As per HM Treasury's Technical Note 1 - How to Account for PPP Transactions, residual interests are accounted for on a net rather than gross basis. Both approaches yield the same results, although the net basis is simpler to apply. Whilst the both approaches yield the same result at the net assets/liabilities level, the gross approach would have a more significant first year impact on Capital Resource Limit (CRL). Accordingly, the net approach is to be favoured for the NHS.
Figure 1 highlights the key differences between each approach, assuming no inflation or change in valuation. The figures are based on Year 1 of the model. The supporting spreadsheets for this and other calculations referred to may be found at: http://www.scim.scot.nhs.uk/Excel/PPPResidualCreditor.xls
Fig 1 - Comparison of Net versus Gross Accounting
Operating cost statement | Gross Basis | Net Basis |
| £000 | £000 |
Income |
|
|
Unwinding of discount | 374 |
|
Total Income | 374 | 0 |
Expenditure |
|
|
Unitary payment (service element) | 2,419 | 2,419 |
Interest payable on residual interest liability | 374 |
|
Capital Charges | 10 | 10 |
Total Expenditure | 2,803 | 2,429 |
Net Operating Cost | 2,429 | 2,429 |
Balance Sheet |
|
|
Fixed Assets |
|
|
Opening residual interest (discounted) | 10,688 | - |
Capitalisation of residual interest |
| 581 |
Unwinding of discount | 374 |
|
Closing residual interest | 11,062 |
|
Cash |
|
|
Payment to Project Co | (3,000) | (3,000) |
Liabilities |
|
|
Opening residual interest liability | (10,688) | - |
Repayment of capital | 207 | - |
Closing balance | (10,481) | - |
Net Assets | 581 | 581 |
The following notes explain how each element of the accounting model were derived.