Matthew Davies outlines a technique students should find helpful when tackling the Public Sector Financial Reporting exam.
Keeping things separate can be a key to success when studying for the CIPFA qualification. Compartmentalising the various sections of each course is a helpful strategy, especially when revising for the exam.
This approach is particularly useful when it comes to preparing for the Public Sector Financial Reporting exam. Students know they will be asked to produce or redraft financial statements for each of the four main types of organisations: NHS foundation trusts, central government, local government and charities. Those who separate their studying and note according to each type of organisation are mirroring the PSFR workbooks.
However, a second type of compartmentalising can also be adopted to enhance the chances of passing. Rather than separating by type of organisation only, try separating by type of transaction as well.
Let’s look at some examples, using a couple of standard scenarios that we apply across the four types of organisations: upwards revaluation of a plant, property and equipment type asset and then its disposal. Using journals, we will compare how the same transaction is accounted for in each type of organisation.
A building with a gross book value of £2.5m and accumulated depreciation to date of £0.2m (thus a net book value of £2.3m) is revalued upwards by 5% at the start of the year. This is the first time the building has been revalued in the accounts. It is then disposed of during the same year for a cash amount of £2.7m. There is no depreciation in the year of disposal. (Although the term gross book value is used in this example, it is worth noting that the terms cost or revalued amount may be used in the exam as well.)
First, let’s see how the journals will reflect the revaluation in all four types of organisations along with some brief explanation of workings. All journals use units of £000s:
NHS
(1) Clear the accumulated depreciation, (2) readjust the GBV to the revalued amount (£2.3m x 1.05 = £2.415m) and (3) credit the revaluation amount with the total increase in value (£2.415m – £2.3m)
Central government
(1) Use backlog depreciation to increase the accumulated depreciation by 5%, (2) increase the GBV by 5% (3) credit the revaluation amount with the total increase in value (£2.415m – £2.3m)
Local government
(1) Increase the NBV by 5% (2) credit the revaluation amount with the total increase in value (£2.415m – £2.3m)
Charities
(1) Clear the accumulated depreciation, (2) readjust the GBV to the revalued amount (£2.3m x 1.05 = £2.415m) and (3) credit the revaluation amount with the total increase in value (£2.415m – £2.3m)
As the above examples show, NHS and charities use the same method of accounting for revaluation, whereas both central government and local government each have their own way to revalue assets. Students need to demonstrate they understand these different methods in the PSFR exam. Now let’s consider the journals for the disposal of the asset and resultant transfer of reserves:
NHS
Central government
Local government
Charities
If the building was used for a restricted purpose any gain or loss would be transferred to the restricted reserve.
From the above exercise we can see the same transaction for all four types of organisations. As a result, we can see both the similarities and differences between the accounting entries. Students will be expected to use the correct accounting entries for each type of organisation and so practice is essential to pick up the necessary marks in the PSFR exam. compartmentalising is an effective strategy for students working towards CIPFA’s PSFR exam.
This article compares a basic upwards revaluation and a gain on the disposal of an asset across all four types of organisations. Employing a similar method to other scenarios – e.g. acquisitions, temporary impairments, permanent impairments and depreciation – students will be better prepared to deal with these transactions in the exam, whichever type of organisation the question is based upon.
- Matthew Davies is a tutor at CIPFA
