Revenue from interest is accrued using the effective interest rate method. This uses an effective interest rate that discounts estimated future cash payments through the life of the asset to the net carrying amount of the financial liability. Revenue from dividends is recognised when the right to receive a dividend is established.
1.12 Expenditure
Expenditure is recognised in the period in which it is incurred.
1.12.1 Social security benefits
Included in social security benefits are statutory entitlements (most of which are included in the Social Security Contributions and Benefits Act 1992), payable to private individuals and households. Social security benefits are accounted for as expenditure in the period to which they relate.
Social security benefits include tax credits, which are recognised in the year in which they are assessed and authorised by HMRC. Authorisation is the point at which the obligation to pay the tax credit arises. Payments of tax credits are provisional until entitlement is finalised after the financial year end. Where under or overpayments are identified, either during the award year or
subsequently, adjustments are made to expenditure. Receivables and payables are recognised as appropriate. Correcting payments are made in respect of underpayments, however if a customer has an existing receivable balance the underpayment is offset against the receivable. Overpayments are treated as other receivables and HMRC seeks to recover these from future personal tax credits awards or through direct repayments.
The state pension is included within social security benefit expenditure.
1.12.2 Staff costs
Staff costs include salaries and wages, the costs of pensions and other employee benefits. Staff costs that can be attributed directly to the construction of an asset have been capitalised. They will be included in the cost base of the relevant asset and therefore do not appear in the Statement of Revenue and Expenditure. Average staff numbers include staff engaged on capital projects. Public sector pension scheme costs include current service costs and past service costs. Current service costs are the increase in the present value of the scheme liabilities included in WGA arising from current members’ service in the current period. Past service costs are increases or decreases in the present value of the scheme liabilities related to employee service in prior periods arising in the current period as a result of the introduction, change or improvement to retirement benefits.
1.12.3 Grants and subsidies
Grants and subsidies are recorded as expenditure during the period that the underlying event or activity giving entitlement to the grant occurs. Recognition of entitlement varies according to the details of individual schemes and the terms of the offers made. Unpaid and unclaimed grants are charged to the Statement of Revenue and Expenditure on the basis of estimates of claims not received and are included in accruals in the Statement of Financial Position.
1.12.4 Research and development
Expenditure on research and development is charged to the Statement of Revenue and Expenditure in the year in which it is incurred, unless it meets the criteria set out under IAS 38 ‘Intangible Assets’, in which case it is capitalised.
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1.12.5 Value Added Tax
Many of the activities of government are outside the scope of Value Added Tax (VAT) and, in general, output tax does not apply and input tax is not recoverable. Irrecoverable VAT is charged to the Statement of Revenue and Expenditure and included as part of the cost of the transaction under the heading relevant to the type of expenditure, or is included in the capitalised purchase cost of the asset in the Statement of Financial Position.
1.12.6 Finance costs
Premium Bond prices are recognised in the period to which they relate. Other interest income and costs of financing are determined using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial carrying amount. The calculation takes into account premiums or discounts on acquisition or issue of financial assets and liabilities and all the contractual terms of the financial instrument. The majority of the National Loans Fund’s (NLF) financial assets and liabilities have a fixed return. For those products that have a variable return, the current rate applicable to that product is used in the calculation of the finance income or cost. Liabilities linked to the Retail Prices Index (index- linked gilts and NS&I products) are treated as analogous to floating rate instruments. Gilts with the same maturity and coupon rate are sometimes issued in separate tranches. Because of market conditions each tranche may be issued with a different premium or discount and therefore a
different effective interest rate. However, once issued, gilts with the same maturity and coupon rate are indistinguishable from each other and so are accounted for as one issue using a weighted average effective interest rate.
1.13 Non-current assets
1.13.1 Property, plant and equipment
Property, plant and equipment, unless otherwise stated, are carried at cost on initial recognition and then at fair value or depreciated historical cost where this is used as a proxy for fair value, as interpreted for the public sector context. Council dwellings are fair valued at the existing use value for social housing.
The threshold for capitalising non-current assets is set by each entity as appropriate to their circumstances and disclosed in the accounting policy note in their accounts. Central government departments typically have a capitalisation threshold of £5,000, other than the Ministry of Defence which has a capitalisation threshold of £25,000.
Land and buildings are professionally valued usually at 5 year intervals or when material changes are known to have arisen, and are subject to annual internal reviews.
Gains on revaluation are taken to the revaluation reserve. Losses on revaluation for a particular asset are debited to the revaluation reserve if gains for that asset have been previously recorded, otherwise the full amount is charged to the Statement of Revenue and Expenditure. On sale of the asset, any remaining balance in the revaluation reserve is released to the Statement of Revenue and Expenditure.
1.13.2 Infrastructure assets
Infrastructure assets comprise assets that form part of an integrated network servicing a significant geographical area. These assets usually display some or all of the following characteristics:
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they are specialised and do not have alternative uses they are immovable
they may be subject to constraints on disposal
Infrastructure assets will include road networks, sewer systems, water and power supply systems and communications networks.