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

1 Introduction

1.1 The Accounts and Audit Regulations 2003 require the County Council's Statement of Accounts to be approved by the 30 June following the year end. The County Council has delegated responsibility for the approval of the draft statement of accounts to the Governance Committee.

1.2 A report on the final accounts for 2007/08 was submitted to the Cabinet on
23 June. No further changes have been made subsequently to the accounts, so that the attached Income and Expenditure Account, Statement of Movement on the General Fund balance, Balance Sheet and Pension Fund accounts are consistent with the accounts reported to the Cabinet.

1 Recommendations

1.1 That the Statement of Accounts for 2007/08 be approved.

2 Code of Practice on Local Authority Accounting

2.1 The draft Statement of Accounts has been drawn up in the form prescribed by the 2007 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. Some significant changes were made to the format of the accounting statements last year to separate the income and expenditure recorded in accordance with UK accounting standards from the adjustments to those standards applicable in Local Government for the purposes of setting council tax.

2.2 There are three main changes in the Code of Practice which come into effect for 2007/08's accounts:

· the classification of reserves associated with fixed asset accounting has changed as a result of introducing a revaluation reserve, in accordance with UK accounting standards. This requires information to be retained on both the historic and current cost of assets accounted for at net replacement cost, so that in future the treatment of depreciation and asset disposals can differentiate between the effect on the historic and replacement costs of the assets. Because local authorities are generally mature organisations often with assets dating back to the 19^th century, it would not have been practical to assess in a way that could have been justified as materially correct the historic cost of existing assets. Instead it has been agreed in the Code of Practice that historic cost at
1 April 2007 should be assumed to be the net replacement cost at that date, and that therefore the revaluation reserve commences with a nil value on 1 April 2007, and records the impact of subsequent revaluations. Though this removes the requirement to attempt to assess the historic value of the County Council's assets, there are some systems implications associated with a nil balance revaluation reserve for which a SAP solution is still being sought

· new accounting standards dealing with financial assets and liabilities have been introduced in 2007/08's accounts. These new standards are closely based on the relevant International Financing Reporting Standards (IFRS) and may therefore be a forerunner to the broader changes required as a result of the Government's decision to adopt IFRSs as the basis for future public sector financial reporting and are likely to apply to local authority financial statements from 2010/11. The effect of the new financial instruments standards on the presentation of the financial statements themselves is relatively modest, but they require more extensive disclosures within the notes to the financial statements

· the requirement for the Statement of Accounts to incorporate a statement of internal control signed by the Chief Executive and the Leader of the Council is replaced by an equivalent requirement to incorporate an Annual Governance Statement. The draft statement for 2007/08 has been presented earlier on the agenda of today's meeting.

3 Statement of Accounts

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

Statement of Accounting Policies

3.2 This sets out the policies adopted by the County Council in preparing its accounts, which are largely determined by the Code of Practice. Some changes have been required this year to reflect changes in the 2007 Code of Practice and in the capital finance regulations.

Annual Governance Statement

3.3 The Accounts and Audit (Amendment) (England) Regulations 2006 require 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 in relation to internal control. Based on revised guidance, this now takes the form of an annual governance statement. The County Council's statement has been submitted for approval earlier on the agenda for this meeting and requires the approval and signature of the Chief Executive and Leader of the Council.

Statement of responsibilities for the statement of accounts

3.4 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.

Income and Expenditure Account

3.5 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.

3.6 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, pensions interest cost and return on pension assets and the gain or loss on the disposal of 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.

3.7 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. These are set out in paragraph 4.9. The deficit on the County Council's income and expenditure account is £37.7m in 2007/08. 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

3.8 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 County Council'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 Council's financial stewardship. The adjustments summarised in this statement are either determined by statute or reflect non-statutory proper accounting practices.

3.9 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. Revenue contributions to the financing of capital expenditure and the statutory provision for the repayment of debt are substituted for the depreciation charge in the income and expenditure account. The effect is to reduce expenditure in 2007/08 by £61.2m, and thus increase the general fund balance

· 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). There is also a minor adjustment associated with an interest free loan. These adjustments reduce expenditure by £34.0m and this also increases the general fund balance

· to reverse the gain of £6.5m on the disposal of assets reflected in the income and expenditure account to comply with UK GAAP, as local authorities are not permitted to apply any part of a capital receipt for revenue purposes

· to allow for transfers to and from the general fund to earmarked reserves. Net transfers from the general fund to earmarked reserves total £44.5m in 2007/08, including the contribution of £17.9m to the job evaluation reserve.

3.10 Table 1 below summarises the general fund position and reconciles it with the presentation included in the County Council's management accounts, reported to the Cabinet on 23 June.

Table 1

Statement of total recognised gains and losses

3.11 This is also a new statement required to comply with UK GAAP which was first introduced in 2006/.07 The principle of the new statement is that it brings together all the gains and losses that affect the County Council'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

3.12 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.

3.13 The key distinction is between cash-backed (£177.4m) and non cash-backed reserves (£2.2bn). The County Council's management reporting gives greater prominence to the level of cash-backed reserves in the form of the general fund 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 Revaluation Reserve and the Capital Adjustment account. This value would only become useable if the County Council was to dispose of all its fixed assets at their balance sheet value.

3.14 The pension accounting arrangements also introduced a negative reserve as a mechanism for recognising in the balance sheet the County Council's actuarially assessed pension liability as measured under FRS17, without requiring the liability to be recognised in setting council tax. The County Councils pension liability has reduced significantly from £609.0m to £438.9m during 2007/08, mainly as a result of the higher interest rate used to discount future liabilities reflecting current corporate bond rates.

3.15 The new accounting standard for financial instruments requires that the interest cost over the entire period of an interest free loan made for service purposes be recognised at the time the loan is made, but the Government has regulated so that this initial cost need not be recognized for council tax setting purposes. This results in another small negative reserve on the balance sheet.

Cash flow statement

3.16 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.

3.17 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. The cash flow statement is therefore 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. In view of the current level of Government supported borrowing in relation to past levels of borrowing approvals, a net cash outflow before financing generally occurs, but in 2007/08 as a result of underspendings on revenue and capital activities, there has been a net cash inflow.

Hampshire Pension Fund

3.18 The accounts of the Hampshire Pension Fund are in the same format as those presented to the Cabinet in June. They show that there was a surplus of contributions over benefits payable in the year of £57.0m, that net investment income totalled £70.3m, but that the market value of investments fell by £92.8m, increasing the net assets of the fund by £34.5m from £2.917bn to £2.952bn.

4 Next Steps

4.1 As in 2006/07, the Audit Commission will present a report to the Governance Committee in September on the audit of the 2007/08 accounts, prior to the issue of an audit opinion on the accounts and their publication.

4.2 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.

5 Impact assessment

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

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.