Contact: Jane Lovett, (01962) 847518; [email protected]

1 Introduction

1.1 The Accounts and Audit Regulations 2003 require the Authority's Statement of Accounts to be approved by the 30 June following the year end. Prior to 2003/04, the deadline was 30 September.

1.2 The figures in the report are consistent with the Final Accounts Report also on this agenda. The draft statement includes the Statement of Internal Control which is due to be considered by the Governance Committee on 21 June 2007. Should any changes be made at that meeting the necessary update will be circulated at the meeting.

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 2006 Code of Practice on Local Authority Accounting in the United Kingdom, which constitutes ` proper accounting practice' under the terms of Section 21(2) of the Local Government Act 2003. The code is updated each year to take account of changes in accounting standards and other new developments. This year the revised code includes some significant changes to the format of the main accounting statements and removes the requirement to make a notional interest charge on the value of capital assets employed in the provision of services. The changes to the format of the accounts makes more transparent the divergence between UK accounting standards and the accounting principles which underly the statutory basis for setting council tax.

Format of the main statements

1.2 Previously there was a single consolidated revenue account, which contained the net operating expenditure of the Authority. Some adjustments were made relating to the treatment of fixed assets and retirements benefits and transfers to and from earmarked reserves in order to arrive at the amount to be funded by national and local tax payers. Deductions were then made for income for the year from council tax payers and general government grant, leaving a balancing figure which represented the increase or reduction in the general fund balance. This form of presentation was based on the significance of the general fund balance to the setting of the council tax, but resulted in a consolidated revenue account in a form unique to local authorities.

1.3 The new form of presentation divides the consolidated revenue account into two separate elements:

· An income and expenditure account, which in broad terms incorporates the Authority's net operating expenditure and its income from taxation, and accords with UK accounting standards

· A statement on the movement on the general fund balance which in broad terms incorporates all the local authority specific adjustments required for council tax setting purposes, which were accounted for below net operating expenditure in the former consolidated revenue account. Because decisions on government grant and council tax are related to the overall position of the general fund, not simply to the level of net operating expenditure and because all of the income from government grant and council tax is attributed to the income and expenditure account, it is likely that the income and expenditure account will always record a deficit, which will wholly or partly be offset by a net credit on the statement of movement on the general fund balance.

1.4 The other main presentational change in the Code of Practice is to specify that all of the primary statements (excluding the Pension Fund accounts) should be presented alongside each other followed by a single set of notes to the accounts covering all of the statements. There was no consistent local authority practice previously but the Authority's practice has been to have a separate set of notes following each of the statements rather than a single set.

1.5 Local authority accounts previously contained a notional interest charge as part of the net costs of services to represent the opportunity cost of the capital employed by the authority in providing services. Though the notional interest charge is relevant to cost comparisons and pricing decisions it departs from UK generally accepted accounting practice (UK GAAP) for external reporting and the 2006 Code of Practice removes the requirement to make such a charge, as part of the policy of harmonising public sector accounting with UK GAAP. The effect is to reduce the net cost of services which would previously have been reversed out in the asset management revenue account which is now no longer required, so that the effect on the overall income and expenditure account is neutral.

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 Authority in preparing its accounts, which are largely determined by the Code of Practice. There are no significant changes this year, other than to reflect the exclusion of the notional interest charge.

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.

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 Treasurer within this Authority

· of the 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 Authority

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

Income and Expenditure Account

2.5 The income and expenditure account reports the net cost for the year of all the functions for which the authority is responsible and demonstrates how that cost has been financed from general government grants and income from local taxpayers. The expenditure recorded reflects the value of fixed assets consumed and the projected value of retirement benefits earned by employees in the year.

2.6 The account is divided into three categories:

· the net cost of services recording the costs allocated to a standard classification of services, net of specific grants and income from fees and charges

· items of income and expenditure relating to the local authority as a whole - such as interest payable and receivable and pensions interest cost and return on pension assets. Added to the net cost of services, this provides the authority's net operating expenditure

· the income from local taxation and general government grants in the period. Deducting net operating expenditure from this income provides a net deficit or surplus for the year.

2.7 In practice it is unlikely that a surplus would be recorded, as the statutory requirements for setting the Council tax do not require some of the costs recorded in the income and expenditure account to be taken into account. The deficit on the Authority's income and expenditure account is £21m in 2006/07. The guiding principles in determining the form of the income and expenditure account is that it should measure net operating costs in accordance with UK GAAP, using essentially the conventions that would be applied to a company's audited annual financial statements.

Statement of Movement on the General Fund balance

2.8 This statement discloses the adjustments necessary to a UK GAAP compliant Income and Expenditure account in order to determine the movement in the General Fund balance for council tax setting purposes (commonly described as the Authority's unearmarked balance or just as balances). The inclusion of this statement reflects the importance in a local authority context of the movement in general fund balance as an aspect of the Authority's financial stewardship. The adjustments summarised in this statement either determined by statute or reflect non-statutory proper accounting practices.

2.9 The adjustments can be summarised as follows:

· to allow for capital investment to be accounted for as it is financed, rather than when the fixed assets are consumed. This involves substituting the revenue contributions to the financing of capital expenditure and the statutory provision for the repayment of debt for the depreciation charge in the income and expenditure account.

· to account for retirement benefits as payments become payable to pension funds and pensioners, rather than as future benefits are earned as required by Financial Reporting Standard 17 (FRS17).

· to allow for transfers to and from the general fund to earmarked reserves.

Statement of total recognised gains and losses

2.10 This is also a new statement required to comply with UK GAAP and replaces a previous statement on the total movement in reserves, which was very difficult to interpret. The principle of the new statement is that it brings together all the gains and losses that affect the Authority's net worth including the gains and losses from the revaluation of assets and the actuarial valuation of the pension fund which do not pass through the income and expenditure account.

Balance sheet

2.11 The 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.

2.12 The pension accounting arrangements also introduced a negative reserve as mechanism for recognising in the balance sheet the Authority's actuarially assessed pension liability as measured under FRS17, without requiring the liability to be recognised in setting council tax.

Cash flow statement

2.13 The cash flow statement is designed to demonstrate the changes that have taken place in the Authority'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 be readily 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 statement headed `financing' shows the impact of borrowing decisions in the year on the cash position.

Pension Fund Accounts

2.15 These are new for 2006/07. They are the accounting requirements following the new financing arrangements. Members will be aware that the Authority does no longer meet the pensions outgo directly, instead it pays an employer's pension contribution based on a percentage of pay into the pension fund account. All Fire Authorities are required by legislation to operate a Pension Fund Account and the amounts paid into and out of it are specified by regulation.

2.16 The Account is balanced to nil each year by receiving cash in the form of a pension top-up grant from the Government equal to the amount by which the amount payable from the Account exceeded the amount receivable.

3 Next Steps

3.1 As in 2005/06, the Audit Commission will present a report to the Authority in September on the audit of the 2006/07 accounts, prior to the issue of an audit opinion on the accounts and their publication.

3.2 After final editing the Statement will be published and copies of the document will be sent to Members.

4 Impact assessment

4.1 This report continues a draft statement of accounts prepared in accordance with a statutory code. Compliance with code is not considered to be discriminatory.

5 Recommendation

5.1 That the Draft Statement of Accounts for 2007/07 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.

(Quote list of documents here: either "none" if 1 or 2 above apply; or list the relevant letters, memos, etc and their location).

None

I:\Treasurers\Corporate Finance\Jane\Fire\Final\Final 06 07\F&GP Report - 28 June 2007 - Draft Statement of Accounts 2006 07.doc