The accounting entries are shown below. Figure 1 (Worked Example A) shows the impact on the NHSScotland body's accounts over the entire contract period.
Assumptions
Land at Book Value | £12m |
£10m | |
NPV of reduced payments | £10m |
Profit / (loss) on disposal | Nil |
Primary period | 25 years |
Annual payment | £15m (before reduction for land value) |
Reduction for land value | £606,740 pa |
Actual amount payable | £14,393,260 pa |
Accounting entries
When the decision to dispose is taken:
|
| £m |
(1) | Debit: OCS | 2.000 |
| Credit: Fixed Assets | 2.000 |
|
|
|
| Revaluation to open market value |
|
NOTE : this would be treated as a permanent diminution of value; which is taken to the operating cost statement.
On disposal:
(2) | Debit: OCS disposal account Disposal of the asset | 10.000 |
(3) | Debit: Debtors - prepayment Creation of the debtor | 10.000 |
At the end of year 1:
(4) | Debit: OCS | 0.400 |
| Credit: Debtors - prepayment | 0.400 |
| Write-off of the debtor over 25 years |
|
(5) | Debit: OCS - service charge 14.600 |
| Credit: OCS - interest receivable 0.207 |
| Credit: Cash 14.393 |
| Being the recognition of the annual service charge due. |
The underlying effect is that the total service expense of £15 million is represented by cash consumed of £14.4 million, the consumption of the prepayment of £0.4 million and the unwinding of the discount.
Figure 1
Worked Example A
Year | Annual | Discount | Present | Amount |
1 | 606,740.35 | 0.97 | 586,223 | 14,393,259.65 |
2 | 606,740.35 | 0.93 | 566,399 | 14,393,259.65 |
3 | 606,740.35 | 0.90 | 547,245 | 14,393,259.65 |
4 | 606,740.35 | 0.87 | 528,739 | 14,393,259.65 |
5 | 606,740.35 | 0.84 | 510,859 | 14,393,259.65 |
6 | 606,740.35 | 0.81 | 493,584 | 14,393,259.65 |
7 | 606,740.35 | 0.79 | 476,892 | 14,393,259.65 |
8 | 606,740.35 | 0.76 | 460,766 | 14,393,259.65 |
9 | 606,740.35 | 0.73 | 445,184 | 14,393,259.65 |
10 | 606,740.35 | 0.71 | 430,130 | 14,393,259.65 |
11 | 606,740.35 | 0.68 | 415,584 | 14,393,259.65 |
12 | 606,740.35 | 0.66 | 401,531 | 14,393,259.65 |
13 | 606,740.35 | 0.64 | 387,952 | 14,393,259.65 |
14 | 606,740.35 | 0.62 | 374,833 | 14,393,259.65 |
15 | 606,740.35 | 0.60 | 362,158 | 14,393,259.65 |
16 | 606,740.35 | 0.58 | 349,911 | 14,393,259.65 |
17 | 606,740.35 | 0.56 | 338,078 | 14,393,259.65 |
18 | 606,740.35 | 0.54 | 326,645 | 14,393,259.65 |
19 | 606,740.35 | 0.52 | 315,599 | 14,393,259.65 |
20 | 606,740.35 | 0.50 | 304,927 | 14,393,259.65 |
21 | 606,740.35 | 0.49 | 294,615 | 14,393,259.65 |
22 | 606,740.35 | 0.47 | 284,653 | 14,393,259.65 |
23 | 606,740.35 | 0.45 | 275,027 | 14,393,259.65 |
24 | 606,740.35 | 0.44 | 265,726 | 14,393,259.65 |
25 | 606,740.35 | 0.42 | 256,740 | 14,393,259.65 |
| 15,168,508.75 |
| 10,000,000 | 359,831,491.25 |