Select Committee on Treasury Minutes of Evidence

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, nonfinancial 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.


  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 eg the Child Support Agency and non-departmental public bodies (NDPBs) eg 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.


  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.


  9.  The Strategic Rail Authority's (the SRA) financial accounts are prepared in accordance with UK GAAP,[5] 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 standby 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.[6]


  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."

24 October 2002

5   As modified by guidance issued by HM Treasury, where relevant. Back

6   Definition as per the Resource Accounting Manual, which follows GAAP (Financial Reporting Standard 12). A list of the Government's contingent liabilities, as defined in Government Accounting, is reported to Parliament annually, by Government department, and published in the Consolidated Fund and national Loans Fund Accounts Supplementary Statements. Back

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