Notes to the financial statements
1. Statement of accounting policies
These financial statements have been prepared in a form directed by the Secretary of State and in accordance with the Financial Reporting Manual (FReM) 2019/20, issued by HM Treasury, and the Department of Health and Social Care (DHSC) Group Accounting Manual (GAM) 2019/20. The accounting policies contained in the FReM and GAM follow International Financial Reporting Standards (IFRS) as adapted or interpreted for the public sector context. Where the FReM or GAM permits a choice of accounting policy, the accounting policy that is judged to be most appropriate to the particular circumstances of CQC for the purpose of giving a true and fair view has been selected. The particular policies adopted are described below. These have been applied consistently in dealing with items considered material in relation to the accounts.
The financial statements are presented in £ sterling and all values are rounded to the nearest thousand except where indicated otherwise.
1.1 Going concern
CQC’s annual report and accounts have been prepared on a going concern basis. The main source ofCQC’s funding is fees charged to registered providers. This risk is managed through regular cash flow reporting and the monitoring of outstanding debts, see note 8. In addition, grant-in-aid funding is drawn from DHSC to fund non-chargeable activities and capital expenditure.
1.2 Accounting convention
These accounts have been prepared under the historical cost convention modified to account for the revaluation of property, plant and equipment and intangible assets.
1.3 Critical accounting judgements and key sources of estimation uncertainty
In the application of CQC accounting policies, management is required to make various judgements, estimates and assumptions. These estimates and associated assumptions are based on historical experience and other factors that are relevant. Actual results may differ from those estimates. The estimates and underlying assumptions are continually reviewed. Towards the end of 2019/20 CQC experienced an operational impact due to COVID-19 pandemic. If this has impacted our accounting judgements or uncertainty of our estimates, we have provided details in the appropriate note.
Areas of significant judgement include:
- IAS 19 Employee Benefits: the most significant judgements relate to the valuation of CQC’s share of assets and liabilities in 15 local government pension schemes (LGPS). The underlying assumptions are reviewed on an ongoing basis by the fund actuaries. Financial assumptions are based on market expectations at the Statement of Financial Position date and demographic assumptions reflect the best estimate of the likely future timing of future benefit payments. Key assumptions used are detailed in note 5.2. The value of assets and liabilities are sensitive to changes in discounts rates, a sensitivity analysis is found in note 5.10.
- IAS 36 Impairments: management make judgements on whether there are any indications of impairment to the carrying amounts of CQC’s non-current assets (see accounting policy note 1.13, note 6 and note 7)
- IFRS 9 Financial Instruments: the expected credit loss of receivables is determined by probabilities calculated using historic collection data for groups of receivables (see accounting policy note 1.18 and note 9).
- Indexation of non-current assets: annually intangible assets and property, plant and equipment are revalued using indices published by the Office for National Statistics (see accounting policy notes 1.11 and 1.12, note 6 and note 7).
1.4 Operating segments
Net expenditure is analysed in the Operating Segments note (note 2) and is reported in line with management information used within CQC.
1.5 Revenue
In the application of IFRS 15 several practical expedients offered in the standard have been employed. These are as follows:
- CQC will not disclose information regarding performance obligations as part of a contract that has an original expected duration of one year or less;
- CQC is to similarly not disclose information where revenue is recognised in line with the practical expedient offered in the standard where the right to consideration corresponds directly with value of the performance completed to date; and
- the FReM has mandated the exercise of the practical expedient offered in the standard that requires CQC to reflect the aggregate effect of all contracts modified before the date of initial application.
The main source of revenue for CQC is the annual statutory fees charged to all registered providers of regulated activities in accordance with the Health and Social Care Act 2008 (as amended). This revenue is recognised when (or as) performance obligations are satisfied by transferring promised services to the customer and is measured at the amount of the transaction price allocated to that performance obligation. The FReM has adapted the definition of a contract to include legislation, such as the Health and Social Care Act 2008 (as amended), which enables CQC to receive cash from another entity. Statute requires CQC to perform the continual task of maintaining the register of providers of regulated activities over the whole period of registration, and without being registered it is unlawful for a provider to operate. Fees are charged in accordance with the fees scheme for 2019/20, published with the consent of the Secretary of State for Health, and are invoiced on the anniversary of initial registration. Revenue is recognised equally over the 12-month period of registration that the fee covers as performance obligations are satisfied. In cases of voluntary de-registration, fees are refunded to registered organisations in accordance with the fee rebate scheme detailed on CQC’s website.
Where statutory fees are paid and exceed the value of performance obligations satisfied at the end of the accounting period the income is deferred (note 11).
Payment terms are standard reflecting cross-government principles. Statutory annual fees are payable within 30 days of the invoice date otherwise the provider can opt to pay in equal instalments by direct debit.
The value of the benefit received when CQC accesses funds from the government’s apprenticeship service are recognised as income in accordance with IAS 20, Accounting for Government Grants. Where these funds are paid directly to an accredited training provider, non-cash income and a corresponding non-cash training expense are recognised, both equal to the cost of the training funded.
1.6 Employee benefits
Salaries, wages and employment-related payments, including payments arising from the apprenticeship levy, are recognised in the period in which the service is received from employees. The cost of annual leave earned but not taken by employees at the end of the period is recognised in the financial statements to the extent that employees are permitted to carry forward leave into the following period.
NHS pensions
Past and present employees of CQC are covered by the provisions of the NHS Pensions Scheme. The scheme is an unfunded, defined benefit scheme that covers NHS employers, general practices and other bodies, allowed under the direction of the Secretary of State, in England and Wales. The scheme is not designed to be run in a way that would enable CQC to identify their share of the underlying scheme assets and liabilities. Therefore, the scheme is accounted for as if it were a defined contribution scheme: the cost to CQC of participating in the scheme is taken as equal to the contributions payable to the scheme for the accounting period.
For early retirements, other than those due to ill-health, the additional pension liabilities are not funded by the scheme. The full amount of the liability for the additional costs is charged to expenditure at the time CQC commits itself to the retirement, regardless of the method of payment.
The schemes are subject to a full actuarial valuation every four years and an accounting valuation every year.
Local government pensions
Some employees are members of the Local Government Pension Scheme (LGPS), which is a defined benefit pension scheme that is administered through 15 pension funds. Employees who were members of the LGPS in a predecessor organisation were permitted to keep their legacy arrangements when their employment transferred to CQC on 1 April 2009. Membership to LGPS is closed to new CQC employees.
Actuarial valuations are carried out at each Statement of Financial Position date. The scheme assets and liabilities attributable to those employees can be identified and are recognised in CQC’s accounts. The assets are measured at fair value, and the liabilities at the present value of the future obligations. Charges recognised in the Statement of Comprehensive Net Expenditure are detailed below:
Charged to staff costs:
- Current service cost – the increase in liabilities because of additional service earned in the year.
- Past service cost – the increase in liabilities arising from current year decisions, the effect of which relates to the years of service earned in earlier years.
- Administration expense – charges representing the cost of administering the fund.
- Gains or losses on settlements and curtailments – the result of actions to relieve the liabilities or events that reduce the expected future service or accrual of benefits of employees.
Charged to other expenditure:
- Net interest cost – the expected increase in the present value of liabilities during the year as they move one year closer to being paid.
Charged to other comprehensive expenditure:
- Actuarial gain or loss on assets and liabilities – the extent to which investment returns achieved in year are different from interest rates used at the start of the year.
Other pension schemes
CQC employees that are not eligible to join the NHS Pensions Scheme are enrolled in the National Employment Savings Trust (NEST). The scheme is accounted for as if it were a defined contribution scheme: the cost to CQC of participating in the scheme is taken as equal to the contributions payable to the scheme for the accounting period.
1.7 Other expenses
Other operating expenses are recognised when, and to the extent that, the goods or services have been received. They are measured at the fair value of the consideration payable.
1.8 Grants receivable
Grants received, including grant-in-aid received for revenue and capital expenditure is treated as financing and credited to the general reserve.
1.9 Apprenticeship levy
CQC is required to pay an apprenticeship levy amounting to 0.5% of the total pay bill, less an allowance of £15,000. The levy is recognised as an expense and included as an additional social security cost within the financial statements.
It is expected that apprenticeship funding will be passed directly to training providers. Where a CQC employee receives training funded by the levy, CQC will recognise a non-cash expense in the period in which the training occurs. An additional non-cash income amount, equal to the costs paid directly to the training provider, is also recognised.
1.10 Value added tax
Irrecoverable value added tax (VAT) is charged to the relevant expenditure category or included in the capitalised purchase cost of non-current assets. Where output tax is charged or input VAT is recoverable, the amounts are stated net of VAT.
1.11 Intangible assets
Intangible assets are non-monetary assets without physical substance, which are capable of sale separately from the rest of CQC’s business or which arise from contractual or other legal rights.
They are capitalised if:
- it is probable that future economic benefits will flow to, or service potential will be supplied to CQC
- it is expected to be used for more than one financial year
- the cost of the item can be measured reliably, and either,
- the item has a cost of at least £5,000, or
- collectively, a number of items have a cost of at least £5,000 and individually have a cost of more than £250, where the assets are functionally interdependent, had broadly simultaneous purchase dates, are anticipated to have simultaneous disposal dates and are under single managerial control.
Software that is integral to the operating of hardware, for example an operating system, is capitalised as part of the relevant item of property, plant and equipment. Software that is not integral to the operation of hardware, for example application software, is capitalised as an intangible asset.
Expenditure relating to IT software and software developments, including CQC’s website, is capitalised if the asset has a cost of at least £5,000 or considered part of a collective group of interdependent assets with a total cost exceeding £5,000 and has a useful life of more than one year.
General IT software project management costs are not capitalised.
Intangible assets are initially recognised at cost. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the criteria for recognition are initially met. Where no internally generated intangible asset can be recognised, the expenditure is recognised in the period in which it was incurred.
Revaluations are performed with sufficient regularity to ensure that carrying amounts are not materially different from those that would be determined at the end of the reporting period. All assets are revalued annually using the appropriate producer price index (PPI) as published by the Office for National Statistics.
An increase arising on revaluation is taken to the revaluation reserve except when it reverses an impairment for the same asset previously recognised in expenditure, in which case it is credited to expenditure to the extent of the decrease previously charged there. A revaluation decrease that does not result from a loss of economic value or service potential is recognised as an impairment charged to the revaluation reserve to the extent that there is a balance on the reserve for the asset, and thereafter to expenditure. Gains and losses recognised in the revaluation reserve are reported as other comprehensive net expenditure in the Statement of Comprehensive Net Expenditure.
1.12 Property, plant and equipment
Expenditure on office refurbishments, furniture and fittings, office equipment, IT equipment and infrastructure is capitalised if:
- it is held for use in delivering services or for administrative purposes
- it is probable that future economic benefits will flow to, or service potential will be supplied to CQC
- it is expected to be used for more than one financial year
- the cost of the item can be measured reliably, and either,
- the item has cost of at least £5,000, or,
- collectively, a number of items have a cost of at least £5,000 and individually have a cost of more than £250, where the assets are functionally interdependent, had broadly simultaneous purchase dates, are anticipated to have simultaneous disposal dates and are under single managerial control.
All property, plant and equipment is measured initially at cost, representing the cost directly attributable to acquiring the asset and bringing it to the location and in the condition necessary for it to operate in the manner intended by management. Assets that are held for their service potential and are in use are measured subsequently at their current value in existing use.
Revaluations of property, plant and equipment are performed with sufficient regularity to ensure that carrying amounts are not materially different from those that would be determined at the end of the reporting period. Assets are restated at current value each year using the appropriate producer price index (PPI) as published by the Office for National Statistics.
Revaluations and impairments are treated in the same manner as for intangible assets, note 1.11.2.
1.13 Amortisation, depreciation and impairments
Non-current assets are depreciated or amortised from the date that they are brought into use. Assets under development are not amortised.
Depreciation and amortisation is charged to write off the costs or valuation of property, plant and equipment and intangible assets, less any residual value, on a straight-line basis over their estimated useful lives. The estimated useful life is the period over which CQC expects to obtain economic benefits or service potential from the asset. This is specific to CQC and may be shorter than the physical life of the asset itself. Estimated useful lives and residual values are reviewed each year-end, with the effect of any changes recognised on a prospective basis.
| Asset type | Estimated useful life |
|---|---|
| IT software developments | 3 to 5 years |
| Software licence | 3 to 5 years |
| Website | 3 to 5 years |
| Asset type | Estimated useful life |
|---|---|
| Information technology | 3 to 7 years |
| Furniture and fittings | 10 years (or lease break date if lower) |
At each financial year-end, CQC checks whether there is any indication that its property, plant and equipment or intangible assets have suffered an impairment loss. If there is indication of such an impairment, the recoverable amount of the asset is estimated to determine whether there has been a loss and, if so, its amount. Intangible assets not yet available for use are also tested for impairment annually at the financial year-end.
Impairment losses that arise from a clear consumption of economic benefit are taken to expenditure. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of the recoverable amount but capped at the amount that would have been determined had there been no initial impairment loss. The reversal of the impairment loss is credited to expenditure.
1.14 Leases
Operating lease payments are recognised as an expense on a straight-line basis over the lease term. There are no finance leases.
1.15 Provisions
Provisions are recognised when CQC has a present legal or constructive obligation as a result of a past event, it is probable that CQC will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the expenditure required to settle the obligation at the end of the reporting period, taking into account the risks and uncertainties.
Where a provision is measured using the cash flows estimated to settle the obligation, its carrying amount is the present value of those cash flows using HM Treasury’s discount rates.
Early retirement provisions are discounted using HM Treasury’s pension discount rate of minus 0.50% (2018/19: 0.29%) in real terms. All other provisions are subject to three separate discount rates according to the expected timing of cash flows from the Statement of Financial Position date:
- a short-term rate of 0.51% (2018/19: 0.76%) for expected cash flows up to and including five years
- a medium-term rate of 0.55% (2018/19: 1.14%) for expected cash flows over five years up to and including 10 years
- a long-term rate of 1.99% (2018/19: 1.99%) for expected cash flows over 10 years.
All percentages are in real terms.
1.16 Contingent liabilities and contingent assets
A contingent liability is:
- a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of CQC, or
- a present obligation that is not recognised because it is not probable that a payment will be required to settle the obligation, or the amount of the obligation cannot be measured sufficiently reliably.
A contingent liability is disclosed unless the possibility of a payment is remote.
A contingent asset is a possible asset that arises from past events and the existence of which will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of CQC. A contingent asset is disclosed where an inflow of economic benefits is probable.
Where the time value of money is material, contingent liabilities and contingent assets are disclosed at their present value.
1.17 Cash and cash equivalents
Cash is cash-in-hand and deposits with any financial institution repayable without penalty on notice of not more than 24 hours. Cash equivalents are investments that mature in 3 months or less from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value.
1.18 Financial assets
Financial assets are recognised when CQC becomes party to the contractual provision of the financial instrument or, in the case of trade receivables, when the goods or services have been delivered. Financial assets are de-recognised when the contractual rights have expired or when the asset has been transferred and CQC has transferred substantially all of the risks and rewards of ownership or has not retained control of the asset.
Financial assets are initially recognised at fair value plus or minus directly attributable transaction costs for financial assets not measured at fair value through profit or loss. Fair value is taken as the transaction price, or otherwise determined by reference to quoted market prices, where possible, or by valuation techniques.
Financial assets are classified into the following categories: financial assets at amortised cost, financial assets at fair value through other comprehensive income, and financial assets at fair value through profit and loss. The classification is determined by the cash flow and business model characteristics of the financial assets, as set out in IFRS 9, and is determined at the time of initial recognition.
CQC’s only financial assets are trade receivables which are measured at amortised cost.
Financial assets measured at amortised cost are those held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and where the cash flows are solely payments of principal and interest. This includes most trade receivables, loans receivable, and other simple debt instruments.
After initial recognition, these financial assets are measured at amortised cost using the effective interest method, less any impairment. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the life of the financial asset to the gross carrying amount of the financial asset.
For all contract assets CQC recognises a loss allowance representing the expected credit loss on the financial asset.
CQC adopts the simplified approach to impairment, in accordance with IFRS 9, and measures the loss allowance for any trade receivables at an amount equal to the lifetime expected credit losses.
Expected credit loss allowances of trade receivables are determined by applying a weighted probability of a loss event occurring during the lifetime of the asset. This includes the probability of the whole amount becoming irrecoverable, part of the amount becoming irrecoverable and full recovery. These probabilities are determined by historic recovery for each category of receivables: income from fees by sector and income from other activities.
HM Treasury has ruled that central government bodies may not recognise stage 1 or stage 2 impairments against other government departments, their executive agencies, the Bank of England, Exchequer Funds, and Exchequer Funds’ assets where repayment is ensured by primary legislation. CQC therefore does not recognise loss allowances for stage 1 or stage 2 impairments against these bodies. Additionally, DHSC provides a guarantee of last resort against the debts of its arm’s length bodies and NHS bodies (excluding NHS charities), and CQC does not recognise loss allowances for stage 1 or stage 2 impairments against these bodies.
For financial assets that have become credit impaired since initial recognition (stage 3), expected credit losses at the reporting date are measured as the difference between the asset’s gross carrying amount and the present value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. Any adjustment is recognised in the Statement of Comprehensive Net Expenditure.
1.19 Financial liabilities
Financial liabilities are recognised in the Statement of Financial Position when CQC becomes party to the contractual provisions of the financial instrument or, in the case of trade payables, when the goods or services have been received. Financial liabilities are de-recognised when the liability has been discharged, that is, the liability has been paid or has expired.
Non-current payables are discounted when the time value of money is considered material. Consequently, the liability for additional pension contributions resulting from the early termination of staff in previous years is discounted by minus 0.50% (2018/19: 0.29%). This is the rate for market yields on AA corporate bonds as published by HM Treasury.
1.20 IFRS standards that have been issued but have not yet been adopted
The GAM does not require the following IFRS standards and interpretations to be applied in 2019/20.
- IFRS 16 Leases: application as interpreted and adapted by the FReM is to be effective from 1 April 2022. This represents a further two-year deferral. CQC currently has commitments under operating leases of approx. £8.5m, which IFRS 16 requires to be recognised on the Statement of Financial Position as right of use assets. Corresponding lease liabilities will also be recognised on transition to the standard as currently interpreted by the FReM.
- IFRS 17 Insurance Contracts: application is required for accounting periods beginning on or after 1 January 2023 but has not yet been adopted by the FReM. Early adoption is not therefore permitted. CQC do not expect the adoption to have a material impact on the Financial Statements.
2. Analysis of net expenditure by activities
4. Operating expenditure
5. Pension costs
5.1 Pension assets and liabilities
5.2 Actuarial assumptions
5.3 Charges to net expenditure
5.4 Charges to other comprehensive net expenditure
5.5 Amount recognised in the Statement of Financial Position
5.6 Reconciliation of fair value of scheme liabilities
5.7 Reconciliation of fair value of employer assets
5.8 Fair value of employer assets
The weighted average duration of the defined benefit obligation of the pension schemes is between 12 and 17 years (Teesside: 17 years).
The funded nature of the LGPS requires participating employers and employees to pay contributions into the fund calculated at a level intended to balance the pension liabilities with investment assets. Information on the framework for calculating contributions to be paid is set out in the LGPS Regulations 2013 and the Funding Strategy Statement of each fund.
Contribution rates for each of the schemes are reviewed at least every three years following a full actuarial valuation. The last triennial actuarial valuation was completed as at 31 March 2019 which set the employer contribution rates for three years from 1 April 2020 to 31 March 2023. Some of the funds have also levied a cash sum in addition to a percentage of payroll costs as part of the deficit recovery plan. Increases to local government pensions in payment and deferred pensions have been linked to annual increases in the consumer price index (CPI), rather than the retail prices index (RPI).
Contribution rates for 2020/21 range between 0% and 49.2% (17.9% for Teesside Pension Fund) with annual cash sums ranging from £7k to £515k (£nil for Teesside Pension Fund). It is estimated that employer contributions for 2020/21 will total £4,363k (Teesside: £2,579k).
When the active membership in any of the funds falls to zero the administering authority will obtain an actuarial valuation of the current and former employees as at the termination date. CQC would be required to pay any cessation deficit that is determined, however any surplus would be refunded. DHSC have provided a guarantee to meet the pension deficit liability that falls due.
All LGPS are multi-employer defined benefit plans. CQC’s share of the total fund assets is immaterial in all funds except for in the Teesside Pension Fund which at 31 March 2020 was 7% (31 March 2019: 8%)
6. Intangible assets
7. Property, plant and equipment
8. Financial instruments
Liquidity risk
CQC’s cash requirements are met through annual registration fees charged to providers and grant-in-aid from DHSC. The fees scheme published in April 2019 sets fees for all sectors at full chargeable cost recovery, which results in the fees paid by providers becoming the main source of funding for CQC.
CQC manage liquidity risk through regular cash flow forecasting to ensure that sufficient funds are available to cover working capital requirements. At 31 March 2020 the COVID-19 pandemic had no material impact on CQC’s liquidity and this risk was mitigated as part of our decision making.
CQC have no borrowings, relying on the collection of fees and grant-in-aid from DHSC to cover cash requirements.
Credit risk
Credit risk arises from cash and cash equivalents and accounts receivable. Management monitors the collection of fees closely and all undisputed debts that have reached 61 days past due, and where internal recovery processes have been exhausted, are sent to an external debt collection company.
In response to the COVID-19 CQC have supported registered providers by offering revised payment schedules to those facing financial difficulties and put a hold on any accounts being sent to external debt collection. All outstanding fees remain due and the impact of the pandemic has been closely monitored by management.
The maximum exposure to credit risk at the reporting date is the fair value of each of the receivables mentioned above. CQC does not hold any collateral as security.
Market risk
CQC is not exposed to currency or commodity risk. All material assets and liabilities are denominated in sterling. With the exception of cash and cash equivalents, CQC have no interest-bearing assets or borrowing subject to variable interest rates. Income and cash flows are largely independent of changes in market interest rates.
9. Trade receivables and other current assets
11. Trade payables and other current liabilities
12. Provisions for liabilities and charges
13. Reconciliation of movements in the Statement of Cash Flows
16. Commitments under operating leases
17. Other financial commitments
19. Related party transactions
CQC is a non-departmental public body sponsored by DHSC. DHSC is regarded as a related party. During the year CQC has had a significant number of material transactions with DHSC, and with other entities for which DHSC is also regarded as the parent department including NHS England, NHS foundation trusts, NHS trusts, NHS special health authorities and other non-departmental public bodies.
In addition, CQC had a significant number of transactions with other government departments and other central and local government bodies. Most of these transactions have been with the Government Property Agency in respect of rent for office space. CQC also had amounts owed to the NHS Pension Scheme and other government departments including HMRC.
During the year there were no material transactions with organisations in which members of the Board, key managers or other related parties hold an interest.
20. Events after the reporting period date
Events after the reporting period are considered up to the date on which the Financial Statements are authorised for issue.
Two key events, the COVID-19 pandemic and the transition period following the United Kingdom’s exit from the European Union, have been considered and neither would require an adjustment to the Financial Statements.
21. Authorised date for issue
CQC’s Annual report and accounts are laid before Parliament. The Financial Statements were authorised for issue on 4 February 2021 by the Chief Executive as Accounting Officer.
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You can download our financial statements as open document spreadsheets:
Statement of Comprehensive Net Expenditure for the year ended 31 March 2020
Statement of Financial Position as at 31 March 2020
Statement of Cash Flows for the year ended 31 March 2020
Statement of Changes in Taxpayers’ Equity for the year ended 31 March 2020