Archived decisions

HAMPSHIRE COUNTY COUNCIL

Decision Report

1. Executive Summary

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 Audit Committee.

1.2. A report on the provisional final accounts for 2008/09 was submitted to the Leader's decision day on 19 May and a further report will be submitted to the Cabinet in July in conjunction with year end reporting on performance and workforce issues. Finalisation of the 2008/09 accounts has not materially changed the provisional data reported on 19 May, the overall impact being to increase net operating expenditure by about £0.5m, mainly as a result of a correction to the level of interest receivable. A net underspending of £5.1m has been achieved which is added to balances.

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 2008 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 have been made to the format of the accounting statements over the last two years to separate the income and expenditure recorded in accordance with UK generally accepted accounting practice (UK GAAP) from the adjustments to those standards applicable in Local Government for the purposes of setting council tax. This has a particularly marked impact in 2008/09 for reasons discussed in paragraphs 3.8 and 3.9 below.

2.2. There are two main changes in the Code of Practice which come into effect for 2008/09's accounts, which affect the presentation of the accounting statements:

· the Pension Fund accounts have been prepared in accordance with the revised requirements of the 2007 Pension Statement of Recommended Practice. This introduces a different basis for measuring the market value of investments (reducing the fund's market value by about £4m or 0.1% at 31 March 2008) and some other purely presentational changes

· net operating expenditure in the income and expenditure account is recorded net of specific government grants relating to the relevant services included within the net cost of services. General non-ringfenced government grants are recorded as a funding source for net operating expenditure. In 2008/09 the government introduced a new form of general non-ringfenced government grant, Area based grant, which replaced a number of previously ringfenced specific grants. The Code of Practice requires Area based grant to be treated as a funding source for net operating expenditure, rather than as a grant reducing net operating expenditure. The effect of this treatment is to increase net operating expenditure by £64.7m in 2008/09.

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 minor changes have been required this year to reflect changes in the 2008 Code of Practice.

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 3.11. 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. The main reason that the statutory requirements for setting council tax does not follow UK GAAP is because costs arising from the depreciation of assets and the earning of retirement benefits do not necessarily give rise to cash flows in the short and medium term and it is therefore a matter of intergenerational equity between taxpayers as to the extent to which taxes should be levied currently to meet costs that will crystallise in the future.

3.8. The impact of the difference between the application of UK GAAP and the statutory requirements for setting council tax is particularly striking in 2008/09. Whereas the deficit on the income and expenditure account over the past three years has varied between £12.0m and £37.7m, the deficit in 2008/09 is £482m, despite the County Council having a higher general fund balance (£34.5m), the critical number for council tax setting purposes, than in any of the past three years

3.9. This arises primarily for two reasons:

· because of the sharp fall in the value of land and buildings over the last twelve months it has been necessary during 2008/09 to reduce the value of the County Council's land and buildings valued at open market value in the balance sheet, to reflect lower market values. This reduction in asset values is of the order of £380m. In normal circumstances for an organisation with long term assets valued on a current cost basis, much if not all of this write down would be met from the revaluation reserve. However local authorities have only operated UK GAAP compliant revaluation reserves since 1 April 2007 despite valuing most non-infrastructure assets on a current cost basis since 1995. As it was impractical to assess the historic cost of local authority assets on an auditable basis, the Code of Practice provided for current cost values at 1 April 2007 to be defined as historic cost, resulting in revaluation reserves being established in 2007/08 with nil opening balances. As there are therefore no mature local authority revaluation reserves, the impact of market value reductions falls almost entirely on the Income and Expenditure account. These charges can be reversed in subsequent years if and when market values recover, so that this factor will also distort future years accounting statements

· the transfer of schools from community to foundation or trust status results in the control of school assets transferring from the County Council. Five schools have transferred during 2008/09, reducing the County Council's fixed assets and resulting in a charge to the income and expenditure account of £83m. This is a somewhat anomalous charge as it does not reflect a reduction in the value of the assets during the year available for educational purposes within Hampshire, merely the extent to which in accordance with UK GAAP they can be considered to be under the control of the County Council and thus incorporated in the County Council's balance sheet.

Statement of Movement on the General Fund balance

3.10. 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

3.11. 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 depreciation and impairment charges in the income and expenditure account. The effect is to reduce expenditure in 2008/09 by £475m, 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 approximately £15m and this also increases the general fund balance

· to reverse the loss 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, amounting to approximately £8m

· to allow for transfers to and from the general fund to earmarked reserves. Net transfers from the general fund to earmarked reserves total approximately £5m in 2008/09

3.12. 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 Leader's decision day on 19 May.

Table 1

	£m
Movement in balances reported in the management accounts
Planned increases in balances in the revised budget	6.1
Increased balances at 31 March 2009, as a result of 2008/09 Final Accounts, as per paragraph 3 of May 2009 report	5.2
Subsequent adjustment to underspending	0.5
Proposed lower contribution to capital reserve	0.4
Increase in balances during 2008/09	11.2
Movement on the General Fund balance as per the statement of accounts
Deficit on Income and Expenditure account	481.6
Net additional amount credited to the General Fund balance	-492.8
Increase in General Fund during 2008/09	11.2

Statement of total recognised gains and losses

3.13. 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

3.14. 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.

3.15. The key distinction is between cash-backed (£0.2bn) and non cash-backed reserves (£1.7bn). 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.

3.16. 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 increased significantly during 2008/09, from £440m to £728m mainly as a result of the lower market value of the fund's assets at 31 March 2009.

3.17. 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

3.18. 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.

3.19. 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.

Hampshire Pension Fund

3.20. The accounts of the Hampshire Pension Fund show that there was a surplus of contributions over benefits payable in the year of £65m, that net investment income totalled £72m, but that the market value of investments fell by £687m, reducing the net assets of the fund by £550m from £2.948bn to £2.398bn.

4. Next Steps

4.1. The Audit Commission will present a report to the Audit Committee in September on the audit of the 2008/09 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. Recommendation(s)

5.1. That the Statement of Accounts for 2008/09 be approved.

CORPORATE OR LEGAL INFORMATION:

Links to the Corporate Strategy

IMPACT ASSESSMENTS:

1. Equalities Impact Assessment:

1.1. Equality objectives are not considered to be adversely affected by the proposals within this report.

2. Impact on Crime and Disorder:

2.1. The proposals in this report are not considered to have any direct impact on the prevention of crime.

3. Climate Change:

a) How does what is being proposed impact on our carbon footprint / energy consumption?

No specific changes.

b) How does what is being proposed consider the need to adapt to climate change, and be resilient to its longer term impacts?

No specific proposals affecting adaptation to climate change.