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 the approval of the County Council's accounts, which is completed this year with the requirement that the Statement of Accounts is approved by 30 June. Prior to 2003/04, the deadline was
30 September.

1.2 As a result of the tighter timetable for the approval of the accounts, the County Council delegated the power to approve the Statement of Accounts, initially to a separate panel and in May 2006 to this committee.

1.3 A report on the Final Accounts for 2005/06 was submitted to the Cabinet on 26 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 2005 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. There are no significant changes affecting the County Council in the 2005 Code, though some minor changes to the format of the Pension Fund accounts have been introduced.

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. 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 one a year of the effectiveness of the system on 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 submitted for approval earlier on the agenda of this meeting 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 the 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 Committee to confirm that the accounts have been considered and approved by the Committee.

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 and for example continues to differentiate between Education and Social Services rather than Children's and Adult Services.

· 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 the accounting entries relating to pensions required by Financial Reporting Standard (FRS) 17.

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 2005/06 with 2004/05. The explanatory foreword contains a reconciliation of the two approaches and the bottom line reduction of £13,454,000 in the revenue account balance at 31 March 2006 comprises:

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 (£97.1m) and non cash-backed reserves (£1.8bn). 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.

2.10 Fixed assets are re-valued on a five year rolling programme and approximately 40% of fixed assets were re-valued during 2005/06. As a result of capital expenditure in 2005/06 and asset revaluations, the value of the County Council's fixed assets have increased by approximately £565m. This is the main reason why the net worth of the County Council is now assessed at £1.9bn at 31 March 2006 compared with £1.4bn at 31 March 2005.

2.11 The pension accounting requirements of FRS17 also introduce a negative reserve as a mechanism for recognising in the balance sheet the County Council's pension liability as measured under FRS17, but without requiring the liability to be recognised in setting council tax. The County Council's pension liability has reduced very marginally from £597.0m to £588.8m and but for the fact that the County Council is no longer the employer of Magistrates Courts Committee staff, the liability would have increased marginally. This is despite the fact that the market value of the Hampshire Pension Fund increased significantly during 2005/06 and the assets attributable to the County Council as an employer increased by approximately £200m. Counteracting the increase in asset values is the effect of lower interest rates payable on AA rated corporate bonds which provides the basis on which pension liabilities are discounted back to present value. The discount rate used in 2004/05 represented a real interest rate of 2.4% when compared with the general inflation assumption, but the discount rate represents a real interest rate of only 1.9% in 2005/06, thus increasing significantly the present value of the County Council's pension liabilities. There is a perverse logic about this outcome as low bond yields are in part the result of increased investment by Pension Funds seeking to reduce the volatility of their asset valuations, but in so doing increasing the assessed value of their liabilities.

Statement of total movement in reserves

2.12 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 expected to change in the 2006 update of the Code of Practice.

Cash flow statement

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

2.14 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 current 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 2004/05 and 2005/06.

Hampshire Pension Fund

2.15 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 £43m, and that realised and unrealised returns on investments totalled £511m, increasing the net assets of the fund by £554m from £2.159bn to £2.713bn. Equity values have fallen since March and the estimated value of the fund's assets at 31 May 2006 is £2.6bn.

3 Next steps

3.1 Due to the UK adoption of international auditing standards, the process for external audit reporting on the accounts will change this year. A report will be submitted to the Governance Committee in September, prior to the auditor issuing an opinion on the accounts and their publication. Previously any matters arising from the audit would normally have been raised in a report issued simultaneously to the audit opinion or would have been incorporated subsequently in the management letter.

3.2 A set of summary accounts will also be produced and made available to the public condensing the information contained in the full statement of accounts.

Recommendation

1 That the Statement of Accounts for 2005/06 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.

None

NB the list excludes:

1. Published works.

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