25. Notes to Schedule 5

The net costs of the Departmental Objectives are determined as follows:  

Objective 1: Achieving success in the tasks we undertake

This objective comprises the following:

Costs are identified as follows:

• Operations comprises the additional costs incurred deploying the armed forces in military operations, e.g. in Iraq, over and above the costs of maintaining the units involved at their normal states of readiness;
   
• Other military tasks includes ongoing military commitments, e.g. to security in Northern Ireland and Overseas Commands, and the costs of identifying and countering the threat of terrorist attack on the UK mainland, and of maintaining the integrity of UK waters and airspace;
   
• Contributing to the community includes ongoing support activities, e.g. search and rescue, administration of cadet forces. In addition, it includes the costs of assistance to other Government Departments and agencies, e.g. in counter drugs operations; and
   
• Helping to build a safer world includes the costs of defence diplomacy undertaken to build confidence and security with our allies. It also includes the Department's support of wider British interests.

Objective 2: Being ready to respond to the tasks that might arise

The costs of delivering the military capability to meet this objective are analysed among force elements of the front line commands, including joint force units where these have been established, and a small number of centrally managed military support activities.  

In addition to the direct operating costs of the front line units, they include the attributed costs of logistical and personnel support, identified by reference to the output costs of supplier Management Groupings.

In common with all Objectives, these also contain a share of the costs of advising ministers and accountability to Parliament, and apportioned overheads for head office functions and centrally provided services. The total comprises the full costs, including support services, of force elements grouped under the following headings:

Most groupings are self explanatory. The following however should be noted:

• Smaller warships includes mine hunting and offshore patrol vessels;
   
• Amphibious ships includes assault ships providing platforms for landing craft and helicopters, and Royal Fleet Auxiliary landing support ships;
   
• Strategic sealift is the Roll-On Roll-Off ferry facility supporting the Joint Rapid Reaction Force;
   
• Fleet support ships includes Royal Fleet Auxiliary ships providing tanker and replenishment support to warships;
   
• Survey and other vessels includes ocean and coastal survey and ice patrol ships;
   
• Naval aircraft include Sea King, Lynx and Merlin helicopters deployed in anti-submarine, airborne early warning, Royal Marine support, and reconnaissance and attack roles;
   
• Submarines includes the operating costs of submarines and support of nuclear propulsion and weapons systems, including nuclear decommissioning;
   
• Army – Field units includes 1 (UK) Armoured Division, 3 (UK) Division, Joint Helicopter Command and Theatre troops;
   
• Army – Other units includes 2, 4 and 5 Divisions, UK Support Command (Germany), Land support and training;
   
• Strike/attack and offensive support aircraft includes Tornado GR1/GR1A/GR1B/GR4/GR4A, Joint Force Harrier and Jaguar aircraft deployed in strike/attack and offensive support roles;
   
• Defensive and surveillance aircraft includes Tornado F3 and Sentry AEW1 aircraft deployed in UK air defence, and NATO and UN peacekeeping commitments;
   
• Reconnaissance and maritime patrol aircraft includes Canberra and Nimrod R1 aircraft deployed on reconnaissance, and Nimrod MR2 aircraft on maritime patrol. (Tornado GR1A/4A included in strike/attack and offensive support aircraft also undertake reconnaissance roles);
   
• Tankers, transport and communications aircraft includes C-17, Hercules, Tristar and VC10 aircraft providing air transport and air to air refuelling, and smaller transport aircraft (BAe 125/146 and Squirrel helicopters) used in a rapid communications role;
   
• Future capability includes primarily the preparatory costs for the introduction of the Eurofighter aircraft;
   
• Other aircraft and RAF units includes ground forces (e.g. the RAF Regiment) and miscellaneous aircraft not included elsewhere;
   
• Joint and multinational operations includes Chief of Joint Operations HQ and the costs less receipts of UK participation in NATO;
   
• Centrally managed military support includes intelligence operational support and Special Forces; and
   
• Maintenance of war reserve stocks includes the holding costs and charges of munitions and other stocks, above the levels required for planned consumption. (Comparable figures are not available for 2001-02).  

Objective 3: Building for the future

This objective comprises the following elements:

• Research comprises the costs, including capital charges, of the Research Building Block, and research expenditure incurred by other TLBs; and
   
• Equipment Programme refers to the administration and programme costs, primarily of the Defence Procurement Agency, associated with specifying requirements for and procurement of fighting equipment and other assets. The values of fixed asset additions are shown in Note 8.

Attribution to Objectives

Gross expenditure of £32,963 million (76.4%) (2001-02 – 71.7%) and Operating Income of £664 million (48.9%) (2001-02 – 52.9%) were allocated to tasks, force elements or activities directly supporting the Objectives. The remainder were apportioned in one of two ways:

i. by means of cost attributions to 'customer' Management Groupings, using local output costing systems to identify the full local costs of services provided. Cost attributions from suppliers are analysed onward to final outputs on advice from the recipients. If specific advice is not given, attributed costs are assumed to follow the same pattern as locally incurred expenditure:

ii. as an element of central overhead, shared among Objectives in proportion to all other attributions. The force elements etc. described above receive a share of the expenditure and income components of these overheads, on the basis of their net costs. The central overheads comprised:

• Support for ministers and Parliament includes the central provision of advice to ministers and the costs, wherever incurred in the Department, of dealing with Parliamentary business;
   
• Departmental corporate services comprises internal support functions, e.g. payment of bills, payroll administration, and housing and medical care for service personnel; and
   
• Strategic management comprises Departmental policy making functions in strategic, personnel, scientific and medical matters.

Capital employed

The deployment of the Department's capital in support of its objectives does not follow the pattern of operating costs. Net assets totalling £61,986million (76.1%) support the military capability required to meet Objective 2. The remainder comprises assets wholly attributable to tasks within Objective 1 (£3,629 million – 4.4%), and intangible assets, fighting equipment and other assets in the course of construction, assets related to equipment procurement within Objective 3 (£15,853 million – 19.5%), and payment of War Pensions and Allowances (–£30.4m).  

26. Restatement of Balance Sheet and Operating Cost Statement at 31 March 2002

26.1 The restatement of £152,917,000 arises due to a) Machinery of Government changes in respect of War Pensions and Allowances and b) bringing on to Balance Sheet the liabilities in respect of a number of overseas pension schemes in accordance with the requirements of SSAP24.  

26.2 Machinery of Government changes – War Pensions and Allowances  

Under merger accounting rules applicable to Machinery of Government changes, the Department's Balance Sheet and Operating Cost Statement have been restated. The summarised Balance Sheet at 31 March 2002 was as follows:

The Operating Cost Statement for 2001-02 was restated to incorporate costs of War Pensions and Allowances amounting to £1,237,056,000.

26.3 Overseas Pension Schemes

As a result of the change referred to in Note 26.1 above, the opening balance of provision for liabilities and charges was increased by £141,469,000, of which £28,890,000 was allocated to Early Retirement Commitments and £112,579,000 to Other Provisions shown in Note 16. The General Fund was reduced by the same amount.

27. Segmental Analysis of Net Resource Outturn by Top Level Budget (TLB) Holders

Note 1: War Pensions and Allowances – Programme Costs

The Chief Executive of the Veterans Agency is not a Top Level Budget Holder, but exercises all the responsibilities for the programme costs.

Note 2: Conflict Prevention (RFR2)

The analysis of the Conflict Prevention costs is as follows:

The Department’s cost of operation in Iraq (Operation TELIC) forms the main component of the above costs. Further details and assumptions used in arriving at these figures are as set out below:

General

1. The MOD had £1bn, including £400m for capital expenditure on Urgent Operational Requirements (UOR), in voted provision for Operation TELIC in the Spring Supplementary Estimates 2002-03. The resource outturn in 2002-03 for the operation was £629 million, which reflects the costs for the period to 31 March 2003, including military action that began on the night 19/20 March;

2. The capital expenditure on UORs for Operation TELIC paid and accrued in the financial statements amounted to £218 million; and

3. Full details of the Department's aims and performance assessment for Operation TELIC are provided in the Departmental Performance Report with further information in the 'Iraq First Reflections Report', which was published in July 2003.  

Assumptions

The following assumptions have been used in arriving at the net resource outturn figures for Operation TELIC:

1. In accordance with the accounting principles agreed with HM Treasury, the Department has identified the costs of Operation TELIC on the basis of net additional costs. Expenditure such as wages and salaries are not included as they would have been incurred in any event, and the costs of activities such as training and exercises, which have been cancelled because of the operational commitment, have been deducted;

2. There have been no fixed asset impairments resulting from the operation in Iraq, though cost of equipment destroyed in the conflict during 2002-03 is included. It is likely that repair and refurbishment costs will need to be incurred in the future in order to bring the equipment back into full operational use; these costs will be reflected in the Operating Cost Statement in the year in which they are incurred;

3. Stock consumption was calculated using the best estimate of stock remaining in theatre at 30 June 2003, and making the necessary adjustments to this figure for issues of additional stock in the three months to 30 June 2003 and for stock consumed pre and post 31 March 2003 based on the level of activity during that period; and

4. Write offs of fighting equipment and GWMB, charged in the financial statements, are based on actual records.

28. Financial Instruments

FRS 13, Derivatives and Other Financial Instruments, requires disclosure of the role which financial instruments have had during the period in creating or changing the risks an entity faces in undertaking its activities. Because of the largely non-trading nature of its activities and the way in which government Departments are financed, the Department is not exposed to the degree of financial risk faced by business entities. Moreover, financial instruments play a much more limited role in creating or changing risk than would be typical of the listed companies to which FRS 13 mainly applies. Financial assets and liabilities are generated by day-to-day operational activities and are not held to change the risks facing the Department in undertaking its activities.  

Liquidity risk

The Department's revenue and capital resource requirements are voted annually by Parliament and are therefore not exposed to significant liquidity risks.

Interest rate risk

A significant proportion of the Department's financial assets and liabilities carry nil or fixed rates of interest. The exposure to interest risk is therefore not significant.  

Foreign currency risk

The Department enters into forward purchase contracts annually with the Bank of England to cover the majority of its foreign exchange requirements for the following year. The details of the outstanding foreign currency contracts were as follows:

Fair values

Financial assets

The Department's financial assets include investments and loans made in Trading Funds, MOD agencies funded through a Trading Fund and QinetiQ, a Self Financing Public Corporation. The net assets of these bodies (excluding MOD loans) and the interest rates applicable to these loans are shown in Note 9. Other financial assets fair values approximates to their book values.  

Financial liabilities

The Department's liabilities include loans from National Loans Fund and Obligations under finance leases and PFI contracts amounting in total to £155.3 million (2002: £149.4 million). The fair values of these liabilities will be different from their book values but since these represent only 1.2% of the gross liabilities and provisions, the impact on the Department's net assets will not be material. The fair value of provisions for liabilities and charges are not materially different to their book values which are stated after discounting at the Treasury rate of 6%. Other liabilities fair values approximate to their book values.

29. Losses and Special Payments

30. Non-Operational Heritage Assets

30.1 The Department owns a range of non-operational heritage assets from historically significant defence equipment, through archive information, to museum and art collections. In accordance with HM Treasury policy non-operational heritage assets are normally valued except where:

a. The cost of the valuation outweighs the benefits that the knowledge of the valuation would deliver; or

b. it is not possible to establish a sufficiently reliable valuation.

On the above basis, no non-operational heritage assets, except land, were valued at the year-end.  

30.2 The scope and diversity of the holdings of non-operational heritage assets which are not valued is illustrated by the examples detailed in the table below:

31. Entities within the Departmental Boundary

The entities within the boundary during 2002-03 were as follows:

Last Updated: 3 Dec 03