Local authority accounting and reporting
Local authority accounting, while based on the same accounting standards as the private sector, does in some cases need to adapt and reinterpret those standards for use in councils. In addition, the government makes specific rules known as statutory requirements that local authorities must follow when they prepare their financial statements, limiting the amount that can be charged to council tax payers and avoiding significant changes in expenditure from one year to the next. As a result, local authority accounting is a combination of the accounting standards that dictate how all organisations should account, and legislation.
Accounting standards known as International Financial Reporting Standards (IFRS) are set by the International Accounting Standards Board (IASB). These set out how accountants should recognise (record) and present items in the annual statement of accounts. Legislation is set out through a mixture of regulations and accounting directions that are issued by the MHCLG and the Welsh Government, requiring councils to treat certain items in the accounts differently from the accounting standards.
All the accounting requirements for councils are brought together in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the ‘CIPFA/LASAAC Code’). This chapter of the guide outlines some of the key accounting principles and looks at the annual statement of accounts that all councils are required to produce. This is a simplified overview that is aimed at giving the reader a general understanding when reading the accounts of councils.
Annual Statement of Accounts
Each local council in England is required to produce an annual statement of accounts in practical terms by 31 May, immediately following the end of the financial year. This date currently differs for Welsh authorities, although there is a timetable which will align authorities in Wales with those of England by 2020/21. The accounts contain detailed information on the financial performance, financial position and cash flows of the council. They show not just the income and expenditure of the council, but also the assets and liabilities it holds. The statement of accounts is a key way that councils are able to demonstrate that they are using public money properly, known as financial stewardship. The format of the statement of accounts is set out in the CIPFA/LASAAC Code and contains the following key statements.
Comprehensive income and expenditure statement
This is where all the income and expenditure of the council is recorded in line with accounting rules. This statement is similar to the one you would find in a private company.
Movement in reserves statement
This statement shows the impact of the financial year on the council’s reserves. This statement also includes all of the income and expenditure that is recognised under accounting rules but which is then adjusted by legislation to give the amount of expenditure that has been funded by the local tax payer.
This statement summarises a council’s financial position at each year end and reports the assets, liabilities and reserves of the council. Some of the reserves are specific to councils, such as the pensions reserve and the capital adjustment account, and exist to allow accounting entries required by legislation.
Cash flow statement
This summarises the cash flows that have been made into and out of the council’s bank account during the financial year.
The principle of accruals is a key one for accounting and it describes when income and expenditure is recognised (included) in the accounts. This contrasts with the simplest form of accounting, the cash basis, when transactions are recognised in the accounts when the actual cash is received or paid out. This cash basis would not, however, accurately reflect the true position of the council as it would not show how much the council owes or is owed.
Under the accruals basis of accounting, income and expenses are recorded when earned and incurred, regardless of when cash is exchanged (ie received or paid). Income is recognised when it is earned (ie services are provided) and expenses are recognised when costs have been incurred (ie goods or services are provided).
Take for example a council purchasing home care services from a supplier in order to meet the needs of an elderly resident who pays for the service received. The council would include the cost of the home care service in its accounts when it is provided even if it had not yet been invoiced or paid for. It would then also include the income due from the resident as soon as the service was provided. Income and expenses included in a council’s accounts that have not yet been settled (ie cash has not been received or paid) will normally give rise to debtor (receivables) and creditor (payables) balances in the council’s balance sheet.
Taking the home care example, a debtor would be created and income recognised even where the income is payable in the future following the eventual sale of the client’s home.
Capital accounting is the term used to describe the entries in a council’s accounts that are made in relation to its non-current assets, otherwise known as property, plant and equipment – mainly buildings, infrastructure and pieces of equipment. They are called ‘non-current’ as they are expected to provide services or economic benefit to the council for more than one year. There are two key elements to capital accounting:
1. to ensure that the value of the council’s assets are correctly reflected in its balance sheet so that the balance sheet gives an accurate view of the council’s overall financial position
2. to reflect the cost of using assets as an expense of the council so that the cost of service provision shows the total cost.
When the council invests in new assets it includes these in the balance sheet at the cost of the investment made plus any expenses. In order to ensure that the balance sheet is kept up to date, assets need to be regularly revalued, at least every five years or more frequently for the assets whose values may be volatile. If council assets are not regularly updated, then the balance sheet will very soon become out of date. To take an extreme example, if a Victorian school building were left on the balance sheet at the amount it cost to build, it may be undervalued by several tens of millions of pounds. The following table sets out the main categories of assets and how they are valued.
The table below reflects the CIPFA/LASAAC Code’s adoption of IFRS 13 Fair Value Measurement , which applied from 1 April 2015. However, the CIPFA/LASAAC Code adapts the measurement requirements for property, plant and equipment and has introduced the concept of current value. This definition of current value means that the measurement requirements for property, plant and equipment providing service potential for an authority have not changed from previously, ie they are measured for their service potential either at existing use value, existing use value – social housing (for council dwellings) or depreciated replacement cost (for specialised assets), and not at fair value.
Since 2015/16, the CIPFA/LASAAC Code has, however, changed the measurement requirements for assets classified as surplus assets. These assets are now measured at fair value in accordance with the definition in IFRS 13 and without any adaptations to that definition. Where applicable, all other assets are measured at fair value.
Table 4.1: Asset valuations
Category of asset
Land and buildings
Land and buildings used to provide services
Current value based on existing use or depreciated replacement cost
A valuation based on how much the assets could be sold for if they were sold for the same purpose they are currently used for, eg a school is valued if sold for use as a school rather than for housing. Revalued at least every five years and more frequently if necessary.
Vehicles, plant and equipment
Vehicles, plant and equipment used to provide services
For example roads, footpaths, bridges and tunnels
Depreciated historical cost
The cost of acquiring the asset or work carried out to date.
Assets under construction
New buildings that are in the process of being built
Houses used to provide social housing
Existing use value – social housing
The current value of the houses if they were to be sold to be used for letting for social rents.
An asset with special qualities that is held and maintained principally for its contribution to knowledge and culture
Valuation, or cost where a value is not available
Value does not have to be professional valuation but could be an insurance valuation (for museum or art gallery exhibits, for example). For some assets, a value may not be available (for example an archaeological site) and cost can be used where this is available.
Assets that the council intends to hold in perpetuity, for example a park
Cost or as per heritage assets
Councils can choose to use cost or the same basis as heritage assets.
Assets held for income generation purposes rather than service provision
Fair value as at balance sheet date
These are valued at fair value (ie highest and best use).
Where a council is in the process of selling an asset or has made the decision to sell an asset, it is classified as an asset held for sale and is included in current assets on the council’s balance sheet. This reflects the fact that the council does not intend to hold the asset for the long term.
When an asset is revalued, this creates a difference between its previous value and its current value. A change in valuation is generally reflected in the revaluation reserve. When an asset’s value falls, ie a revaluation loss (or it is impaired, eg becomes obsolete or physically damaged), the revaluation reserve can be reduced by this fall in value provided that the value of the asset in question has previously increased by at least as much (accumulated revaluation). If the accumulated revaluation figure for an asset is not enough, any balance between the fall in value and the accumulated depreciation has to be charged to the comprehensive income and expenditure statement (CIES).
Depreciation is the term used to describe the charge that is made to the CIES to reflect the council’s use of its assets. The argument is that, in using an asset to provide services, its value is diminished. This is most simply illustrated by taking a vehicle as an example. Suppose a council buys a new minibus for £20,000 which it intends to use for ten years, at which point it expects to sell it for £10,000. If it included just the cash values in its accounts, it would have expenditure of £20,000 in the first year and income of £10,000 in year 11. In years two to ten it would still be using the minibus but would show no cost in its accounts of doing so. If, instead, it spread the £10,000 cost of owning the asset (the purchase cost of £20,000 less its final value of £10,000) over the ten years of expected use, it would charge £1,000 per year to its CIES.
The actual calculation of depreciation is slightly more complicated in practice but the principle remains the same, with an asset’s value, less any final value on disposal, being spread over the expected life of the asset. As the value of land, provided it is not being used for landfill or mineral extraction, does not change as a result of using it, land is not depreciated – only the buildings upon it.
Capital accounting in the movement in reserves statement
The CIES for a council will include the costs of depreciation, charges for impairment and gains and losses on the disposal of non-current assets. Depreciation and impairment have been described above while gains and losses on the disposal of non-current assets reflect the difference between the balance sheet value of an asset and the amount for which it is sold. Due to the way councils are financed and the fact that money received for the sale of non-current assets is tied up in capital receipts, the government does not want these to impact councils’ revenue reserves. So regulations have been made to take these items out in the movement in reserves statement (MiRS). Depreciation is replaced with a minimum revenue provision, which makes a charge to the accounts for the repayment of borrowing associated with capital expenditure. These adjustments are made against the capital adjustment account, which is an unusable reserve and is one of the reserves specific to councils’ accounts.
reserves and Provisions
Reserves are split into usable reserves and unusable reserves in the balance sheet. Usable reserves include general and earmarked reserves, ie those reserves that can be spent on future services. Unusable reserves include all those accounting reserves that cannot be used for expenditure on services (these are explained further below).
General and earmarked reserves
When reviewing their medium-term financial plans and preparing their annual budgets, councils should consider the establishment and maintenance of reserves. These can be held for three main purposes:
1. a working balance to help cushion the impact of uneven cash flows and avoid unnecessary temporary borrowing – this forms part of general reserves
2. a contingency to cushion the impact of unexpected events or emergencies – this also forms part of general reserves
3. a means of building up funds, often referred to as earmarked reserves, to meet known or predicted requirements, but where the requirements or amounts are not certain enough to create a provision.
Earmarked reserves formally remain part of the general fund of the council. The general fund of a council represents the money available to local tax payers that can be used for expenditure on services. Key categories of earmarked reserves are as follows.
Table 4.2: Key categories of earmarked reserves
Category of earmarked reserve
Sums set aside for major schemes, or to fund major reorganisations
Where major expenditure is planned in future years, it is prudent to set aside resources in advance.
Reserves held to fund repairs or replacement of assets where the council chooses not to buy insurance against these costs with external insurance companies.
Reserves of trading and business units
Surpluses arising from trading or business units may be held back to cover potential losses in future years, or to finance capital expenditure.
Reserves retained for service departmental use
Councils may let departments keep all or some of any underspends to use for future projects.
Reserves for unspent revenue grants
Where revenue grants are received by the council with no conditions or where the conditions are met and expenditure has yet to take place, it is recommended that these sums are held in earmarked reserves. (For further information on grant conditions please refer to Module 2, section C of the 2018/19 Code Guidance Notes.)
These are the unspent balances of individual schools’ budgets that can only be used by those schools.
Councils also show a number of accounting reserves on their balance sheets. These are not backed by cash so cannot be spent on council services but arise because of entries in the accounts. These reserves are as follows.
Table 4.3: Unusable reserves
Category of unusable reserve
This reflects the difference between the amount charged for pensions in the accounts under accounting rules and the actual payments made to various statutory pension schemes for the year.
The accumulated balance of changes in the value of non-current assets.
Capital adjustment account
The difference between depreciation and the charges made to the accounts under capital accounting rules and the amounts charged under legislation.
Financial instruments revaluation reserve and financial instruments adjustment account
This reserve recognises (records) the fair value gains and losses for financial assets classified as fair value through other comprehensive income until derecognition.
Unequal pay back pay account
The difference between the amounts charged to the accounts for compensation for unequal pay under accounting rules and the amounts charged under legislation.
Collection fund adjustment account
The difference between the amounts recognised in the accounts for council tax and non-domestic rates income (England) and the amounts charged under legislation.
Councils will hold the following two usable reserves:
1. capital receipts reserve – this reserve holds the proceeds from the sale of assets, and can only be used to fund capital expenditure or repay debt
2. major repairs reserve , where relevant (this applies only to housing authorities in England and Wales) – in England this reserve records the unspent amount of housing revenue account (HRA) balances for capital financing purposes in accordance with statutory requirements. In Wales this represents the amounts unspent from the major repairs allowance capital grant.
A council may set up a provision when it knows that it is probable that it will have to pay out money or transfer assets in the future; for example, the council may be involved in a court case that could eventually result in the payment of compensation. Provisions are charged to the appropriate service line in the CIES when the council becomes aware of the need for them. When payments are eventually made, they are charged to the provision carried in the balance sheet. The level of provisions should be regularly reviewed to ensure they reflect the most accurate estimate of future cost.
IAS 19 Employee Benefits is probably one of the best known financial reporting standards as it has been frequently mentioned in news items about final salary or career average earnings pension schemes. The accounting standard requires the balance sheet to reflect a snapshot of a pension fund’s assets and liabilities at the end of the financial year and the associated costs to be reflected in the CIES.
IAS 19 applies to all employee benefits but has a particular impact on defined benefit schemes where the pension paid is based upon the salary of the recipient, not the amount they have paid into their pension pot. Police and fire schemes are excluded from the accounting standard as they are ‘unfunded’ schemes, where contributions are used to pay existing pensions with the difference underwritten by government.
The difference between the cost of pensions under accounting rules (IAS 19) and the actual payments made is reversed out of the accounts in the MiRS against the pensions reserve in accordance with the requirements of regulations.
Councils may use other accounts to record income and expenditure relating to certain services they provide or functions they carry out. Key accounts include are outlined in the table below.
Table 4.4: Key accounts
Used where a council has set up a trading arm to record income and expenditure to assess whether or not the trading arm is creating a surplus of income over expenditure. The word ‘surplus’ is used instead of ‘profit’ in not-for-profit organisations such as councils.
Housing revenue account
Used to record the income and expenditure related to a council’s housing function and required by legislation.
Used to record income and expenditure related to council tax and non-domestic rates collected by billing authorities.
Local Authority Financial Reporting
The statement of accounts is a key way that councils are able to show they are using public money properly and forms the core of local authority reporting. In addition, councils have to comply with some other key aspects of financial reporting.
The financial statements on their own can be difficult for a lay person to understand and interpret, so explanations and commentary are needed to help the reader make sense of the financial statements and to help demonstrate the extent to which the objectives of the council have been achieved.
Remuneration of senior officials
Since 31 March 2010, councils have been required to include detailed remuneration information for their senior employees in their annual statement of accounts. Remuneration includes all monetary and non-monetary payments made to an employee as part of their employment. It does not include employer pension contributions. However, for the purposes of disclosing senior officer remuneration in England and Wales, employers’ pension contributions must be reported in addition to the remuneration.
The transparency agenda
Councils are required to publish details of all items of expenditure over £500 because the government wants to encourage ‘armchair auditors’ – members of the public with an interest in council finances who are prepared to question councils over what they spend. In February 2015, the then DCLG published its latest version of the Local Government Transparency Code , which councils are required to follow.
The code requires councils to publish the following data:
This data should be published on the council’s website and in a format that is as widely usable as possible.
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