Contact: Nick Gibbins (01962) 84 7544; [email protected]

1 Introduction

1.1 The Accounts and Audit Regulations 2003 set a timetable for progressively bringing forward the deadline for approval of the County Council's accounts as follows:

In recognition that the timing of County Council meetings might not be conducive to meeting the statutory deadlines, the County Council delegated the power to approve the County Council's Statement of Accounts to this panel.

1.2 A report on the Final Accounts for 2004/05 was submitted to the Cabinet on 27 June. No further changes have been made subsequently to the accounts, so that the attached Consolidated Revenue Account, Consolidated Balance Sheet and Pension Fund account are consistent with the accounts reported to the Cabinet.

1 Code of Practice on Local Authority Accounting

1.1 The draft statement of accounts has been drawn up in the form prescribed by the 2004 Code of Practice on Local Authority Accounting in the United Kingdom, which constitutes `proper accounting practice' under the terms of Section 21 of the Local Government Act 2003. The code is updated each year to take account of changes in accounting standards. The main changes this year are as follows:

· 2003/04's accounts incorporated the requirements of the reporting standard on retirement benefits (FRS17) for the first time. This introduced onto the balance sheet an assessment of the difference between the present value of pension liabilities and the share of pension fund assets available to fund those liabilities. A key factor in assessing the value of pension liabilities is the rate of interest used to discount future liabilities back to present value. In 2003/04 the Local Authority Code of Practice adopted the Central Government approach which was to base the discount rate on a rate specified by the Government Actuary rather than to adopt the AA Corporate Bond rate of interest, as set out in FRS17. Following problems with the setting of this alternative interest rate, the Government have opted to adopt the AA Corporate Bond Rate in its accounts for 2004/05 and the Local Authority code of Practice has moved in step. This technical change has quite a significant impact on the calculation of the pension fund liability, as it reduces the discount rate from 6.4% in 2003/04 to 5.3% in 2004/05 and has the effect of adding approximately £200m to the present value of the County Council's pension liabilities. The pension fund liability in the balance sheet has increased from £405m at 31 March 2004 to £597m at 31 March 2005, primarily for this reason. The latter figure includes unfunded liabilities relating to early retirements of teachers and other staff and therefore is not wholly a reflection of the funding level of the Pension Fund and of course only relates to the County Council's own staff.

· some changes have been made to the classification of fixed assets and to the treatment of capital expenditure which does not result in the creation of an asset. As a result the undischarged capital expenditure associated with Local Government Reorganisation costs (£2.1m) has been written out of the balance sheet in 2004/05, though this has no effect on the council tax requirement.

· new criteria have been introduced to determine whether a local authority needs to prepare group accounts to reflect its interests in subsidiaries, associates or joint ventures, as well as a set of single entity accounts. There are transitional arrangements within the Code which defer the main impact of these changes to 2005/06, but currently it is not envisaged that the County Council's interests would be deemed to be material and thus require the production of group accounts.

2 Statement of Accounts

2.1 The Statement of Accounts comprises a number of separate statements, the key features of which are summarised in this paragraph.

Statement of Accounting Policies

2.2 This sets out the policies adopted by the County Council in preparing its accounts, which are largely determined by the Code of Practice. Other than to reflect the changes introduced in the 2004 version of the Code, which were discussed in paragraph 2, there are no significant changes this year.

Statement of Internal Control

2.3 The Accounts and Audit regulations 2003 introduced a requirement for local authorities to conduct a review at least once a year of the effectiveness of the system of internal control and to include, with the statement of accounts, a statement of internal control, prepared in accordance with proper practices. The County Council's statement has been considered by the Governance Committee and requires the approval and signature of both the Chief Executive and the Leader of the Council.

Statement of responsibilities for the statement of accounts

2.4 This statement records the responsibility:

· of a local authority to appoint an officer with responsibility for the proper administration of its financial affairs, the County Treasurer within the County Council

· of the County Treasurer to prepare the accounts in accordance with proper practices as set out in the Code of Practice, and to certify that the accounts present fairly the position of the County Council

· of the Chairman of the Panel to confirm that the accounts have been considered and approved by the Panel.

Consolidated Revenue Account

2.5 The Consolidated Revenue Account analyses revenue expenditure and income for the year, receipts of Government grant, business rates and council tax and the resultant impact on the County Council's balances.

2.6 Net expenditure is classified into three categories:

· operating costs allocated to services - which broadly matches the County Council's definition of service cash-limited expenditure, but also includes capital charges and is net of specific grants. Costs are allocated over standard services rather than as defined by the County Council's decision making structure

· operating costs not allocated to services - comprising trading account surpluses and interest costs offset by the reversal of notional interest charges incorporated within capital charges made to services:

· transfers to and from earmarked reserves and the use of revenue income to finance capital expenditure. These include the reversals required to neutralise the impact of FRS17 and current cost capital accounting on the council tax.

2.7 Whereas management reporting to the Cabinet focuses on comparing actual with budgeted expenditure and income for the year, the presentation in the Consolidated Revenue Account compares 2004/05 with 2003/04. The explanatory foreword contains a reconciliation of the two approaches and the bottom line increase of £5,022,000 in the revenue account balance at 31 March 2005 comprises:

	£000
Planned reduction in balances in 2004/05 revised budget	503
Increase in balances at 31 March 2005 in 2004/05 final accounts - as per June Cabinet report	4,519
	5,022

Consolidated Balance Sheet

2.8 The consolidated balance sheet is presented in a fairly standard format separating fixed assets from current assets and long-term liabilities from current liabilities in arriving at total net assets. Total net worth represents the reserve balances which match net assets.

2.9 The key distinction is between cash- backed and non cash-backed reserves. The County Council's management reporting concentrates on cash-backed reserves in the form of the revenue account balance and earmarked reserves, which are potentially useable to finance revenue and capital spending. The majority of the County Council's net worth is however tied up in the value of its fixed assets, primarily the replacement value of land and buildings, which to the extent that it exceeds outstanding borrowing is reflected in the value of the Fixed Asset Restatement and Capital Financing accounts. This value would only become useable if the County Council was to dispose of all of its fixed assets at their balance sheet value.

Statement of total movement in reserves

2.10 This statement is an attempt to mirror the Statement of Recognised Gains and Losses in commercial accounts but is complicated by the inclusion of various reserve movements required to comply with statutory provisions relating to the setting of council tax and the treatment of capital receipts. As a result, this statement is very difficult to interpret and its format is due to be reviewed in the next update of the Code of Practice.

Cash flow statement

2.11 The cash flow statement is designed to demonstrate the changes that has taken place in the County Council's cash position over the year and to highlight the causes of that change.

2.12 Income from Government grant, national business rates and council tax covers revenue activities, servicing of finance and capital activities, but cannot readily be analysed between the categories, and is therefore shown as an inflow relating to revenue activities. As a result the cash flow statement is always likely to show an inflow in respect of revenue activities offset by outflows relating to the servicing of finance and capital activities. The final section of the main statement headed `Financing', shows the impact of borrowing decisions in the year on the cash position. Given the high level of Government supported borrowing in relation to past levels of borrowing approvals and the County Council's policy of making maximum use of supported borrowing, it is to be expected that there would be a net cash outflow before financing and this is reflected in both 2003/04 and 2004/05.

Hampshire Pension Fund

2.13 The accounts of the Hampshire Pension Fund are in a very similar form to those presented to the Cabinet in June. They show that there was a surplus of contributions over benefits payable in the year of £33m, and that realised and unrealised returns on investments totalled £201m, increasing the net assets of the fund by £234m (12.2%) from £1.925bn to £2.159bn.

3 Publication of the accounts

3.1 After final editing, the statement of accounts will be published once the external audit opinion has been obtained, which cannot be given in advance of member approval of the statements and of the four week period for which the accounts are open for inspection. It is also proposed to produce a set of summary accounts in accordance with emerging best practice on making public sector accounts more accessible to the public.

Recommendation

That the Statement of Accounts for 2004/05 be approved.

Section 100 D - Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

None