A preliminary discussion paper from the CIPFA/LASAAC joint committee for developing group accounting for local authorities
Comments from the Association of Chartered Certified
Accountants
April 2001
It is our view that the current practice of accounting for the net cost of local authority services is not in accordance with UK GAAP. We believe that local authorities should account for the gross cost of services (showing income and expenditure separately) so as to provide better information to users of general purpose financial statements for decision making purposes.
The paper has not provided any sound justification for departing from UK GAAP by effectively proposing to use the equity method for accounting for subsidiaries; indeed we believe that such practice might open the way to manipulation of the accounts. Conversely, we believe that local authorities are justified in departing from UK GAAP when proposing to prepare group accounts for associates and joint ventures when no subsidiaries exist to reflect the best value accounting requirements at service level.
We respond to the specific issues, as raised for discussion in the consultative document, under their respective headlines in the following section.
Specific Comments
Introduction
- In general ACCA supports the view that local
authority accounts should be brought more into line with UK GAAP.
- We interpret section 6 (1) of the Accounts and Audit Regulations 1996, with respect to consolidation, as referring to interests in other entities as well as to the different funds of the authority.
Increased disclosures
- ACCA believes that the current arbitrary practice whereby local authorities are required to prepare group revenue accounts and balance sheets but have the discretion as to whether they prepare group statements for cash flows and total movements in reserves, should not be allowed to continue. We support an approach which would require the mandatory production of all such statements.
Developing the materiality concept
- The Companies Act permits any number of
subsidiary undertakings to be excluded from consolidation "if they are
not material taken together." The ASB Statement of Principles points out
that materiality should not be measured purely in terms of a numerical
threshold. We support, therefore, an approach to materiality which
reflects a comprehensive view of the way in which local authorities
exercise their stewardship function.
- It is our view that in order for local
authorities to fully reflect the best value accounting arrangements it
would be necessary for them to disclose the extent to which they control
or exert significant influence over another entity's operating and
financial policies. We find paragraphs 14, 16 an 17 ambiguous as they
discuss group accounts without distinguishing between the different ways
of reporting subsidiaries and associates/joint ventures.
- We acknowledge that in the absence of an authority having an equity stake in another entity there could be considerable practical difficulties in determining the reporting entity's share of the other entity's results and resources. In such circumstances we suggest that an authority would have to look to other arrangements, such as profit sharing agreements and policies/procedures, to establish the exact relationship.
"Groups" without subsidiaries
- As joint ventures are being undertaken at an
increasing rate throughout the public sector, to consolidate their
activities within group accounts may give out the wrong signals to
stakeholders regarding the level of control that the authority exerts
over such undertakings. It is our view that disclosure information
relating to associate/joint ventures should be identified separately.
- FRS 9 requires companies which do not produce group accounts because they do not have subsidiaries (but which are not otherwise exempt from producing group accounts) to include amounts for associates and joint ventures either by disclosure or by producing separate pro forma 'consolidated' accounts.
Adopting full consolidation
- ACCA believes that in order to reflect a
local authority's ability to deploy both its own economic resources and
those of its subsidiaries (even when they are not wholly owned) all
gains, losses, assets, liabilities and cash-flows should be fully
consolidated in financial statements.
- We do not accept that differences in accounting policies (e.g. capital accounting requirements) between local authorities and their subsidiaries is a reasonable justification for local authorities departing from UK GAAP on the manner of consolidation (particularly as subsidiaries are not commonly encountered in the local authority sector). For consolidation purposes subsidiaries' accounting policies, where different, need to be re-stated using the local authority's policies.
Full inclusion in services
- It is our view that the current practice of
accounting for the net cost of local authority services is not in
accordance with UK GAAP. ACCA supports an approach which shows the full
cost of the group's activities in a given service area as advocated by
the Best Value Accounting Code of Practice. It is our view that in order
to reflect the full cost of the group's activities in a given service
area it would be inappropriate to use the equity method for accounting
for subsidiaries as such accounting practice is open to manipulation.
- We believe that local authorities should
account for the gross cost of their activities (including subsidiaries
whether they are fully or partially controlled) on a line by line basis.
By accounting for income and expenditure separately, local authority
accounts become more transparent and comparable with company accounts
and other public sector entities, providing users of general purpose
financial statements with better information for decision making
purposes.
- We agree with the proposed departure from UK
GAAP to reflect associates and joint ventures in service lines to accord
with the best value reporting requirements. We suggest, however, that
where associate or joint venture arrangements involve significant levels
of resources (income and expenditure) relative to the total cost of the
service, to account for them on a line by line basis, rather than just
to include them at net cost to the service, would provide better
information.
- It is our view that when presenting
consolidated information (either for the authority as a whole or at
service level) in columnar format as the paper suggests, local
authorities should follow where possible the alternative presentation
format as laid out in example 2 of Appendix 1V to FRS 9. To accord with
the best value accounting framework this may involve drawing up three
separate columns to reflect LA, subsidiary and associate/joint venture
activities separately.
- Reporting information in accordance with FRSs 2 and 9 would entail the unbundling of the following elements:
- total income and total expenditure
- operating surplus/deficit
- interest payable and receivable
- surplus/deficit before and after tax (if material)
- less minority interests (subsidiaries)
- surplus deficit after tax and minority interests
- adjustment to total deficit to take out non monetary items (which are not to be passed on to the taxpayers) and offset by any revenue contributions to capital reserves
- financed by taxation (council tax, non
domestic rate and revenue support grant).
- It is ACCA's preferred option that group transactions which are attributable to more than one service should be allocated or apportioned across services to satisfy best value reporting needs (as is advised in the Best Value Accounting Code of Practice for support services).
Other issues
- The paper raises the issue of group
surpluses and losses as an area which may pose a significant problem for
regulation purposes. It is our view that the disclosure requirements of
FRSs 2 and 9 are sufficient to cover the best value accounting and
reporting requirements. With an ever increasing number of local
authorities entering into partnership arrangements to provide services
at best value to the community it is essential that authorities are held
fully accountable for the financial performance of the group including
any associate/joint venture undertakings.
- ACCA shares the concerns of the Joint
Committee regarding the provision in the Government's Resource
Accounting Manual that before an entity is treated as a subsidiary,
associate or venture the authority must be satisfied that the entity is
"not on a list of excluded types of entity" (presumably the Government
has compiled such a list). Indeed this issue has been raised in relation
to government trading funds which are deemed, by the Government, to be
outside the boundary for resource accounting purposes even though many
outputs are delivered through them.
- ACCA does not believe that it is good accounting practice in all cases to exclude trusts and similar funds from consolidated accounts where an authority exercises dominant influence over such funds (for example, pension funds are not consolidated).
Information capture
- The paper raises the issue of the difficulty of procuring information from associates or joint ventures for the purpose of preparing consolidated accounts. It is ACCA's view that in order to satisfy the best value accounting requirements and the Government's modernisation agenda it would be necessary for authorities to have sound financial management information systems in place for the continuous monitoring and reporting of such arrangements. This may necessitate the publication of interim accounts and performance indicators and cross referenced to public service agreements.
Skill base
- With regard to the issue, raised at paragraph
31 of the draft bulletin, that "it is unclear how much practical
experience of group accounting exists in local government" and hence the
related issue of how much "training or guidance practitioners might
need", we advise that:
- the ACCA examination syllabus requires all candidates for membership to study the statutory and best practice rules on group accounting
and moreover
- members of ACCA are required (membership regulation 2.1 (a) ) to "ensure that the quality of their knowledge and service is maintained after admission to membership and should set themselves objectives for their own continuing professional development (CPD)".
- the ACCA examination syllabus requires all candidates for membership to study the statutory and best practice rules on group accounting
- Where there is significant demand from our
members and their employing organisations, ACCA is always willing to
provide special courses or workshops through its CPD programme.
The way forward
- It is our view that local authority group accounts should be prepared for the current financial year. We acknowledge that in the short term it may not be practical for the group accounts to take precedence over the authorities existing Consolidated Revenue Account, however, in the longer term, when local authorities have ironed out any conversion difficulties, this may prove to be a necessary course of action.