Code of Practice on Local Authority Accounting in the United Kingdom - A Statement of Recommended Practice
Comments from the Association of Chartered Certified
Accountants
April 2001
In general ACCA welcomes the Joint Committee's review of the SORP, although, we would have preferred a more comprehensive review as opposed to an update bulletin. We do not support the view that the Joint Committee should have a cut off date (currently the 30th of September each year) before the financial year to which the SORP relates for introducing changes. This practice results in the anomaly that financial reporting standards issued after this date are not considered until the following year as is the current situation for FRS 17 Retirement Benefits (first year disclosure requirements) and FRS 18 Accounting Policies.
For example, the ASB has announced a three year phased implementation plan to allow organisations sufficient time to acquire the necessary information for moving towards the full reporting requirements of FRS 17 for the accounting year ending on or after June 2003. As the first phase of the plan (which requires organisations to make some basic disclosures by way of a note to the accounts) relates to the current financial year, we believe that local authorities and their auditors will need guidance on the extent to which these disclosures requirements will impact on their statutory accounts in the financial year ending 31 March 2002.
We acknowledge that the SORP cannot be updated every time the ASB issues a new reporting standard or an Urgent Issues Task Force Abstract, but we believe that the Joint Committee has sufficient time, both throughout the ASB consultation period and the period leading up to the publication of the standard, to consider the implications of new reporting developments on local authority accounts.
The introduction to the draft update bulletin explains that the SORP relates to statements of accounts which "present fairly" the financial position and transactions of a local authority. It is our view that "present fairly" is rapidly becoming an outmoded term. With the advent of the consolidation of the whole of government accounts prepared on a "true and fair" basis, we believe that a more radical review of the SORP is needed to bring it more in line with UK GAAP.
It is our view that the purpose of the SORP is to provide reasons for and give practical guidance on those areas where departures from UK GAAP are necessary as a result of statute. With reference to John Stanford's recent article in "public finance" we do not acknowledge that adherence to UK GAAP could have an adverse impact on authorities' financial standing and viability. The local authority financing requirement is a separate issue which can be, and is, easily resolved through adjustments to the bottom line. We interpret the local authority statutory duty (i.e. not to budget for a deficit) as meaning that local authorities must base their estimates (income and expenditure) on realistic assumptions i.e. calculated on an accrual's basis (including realistic estimates for non monetary adjustments and taxation levels) so as to achieve a balanced budget.
As such adjustments are deemed necessary to ensure that non monetary items, such as depreciation and notional capital charges for the use of assets, for example, are not passed on to the taxpayer until needed (such as for the purchase of new assets) there does not appear to be any reason why local authorities should not recognise early retirement liabilities in accordance with UK GAAP and deal with the financing of them separately. It is our view also that in reviewing the SORP, the Joint Committee should address the valuation of infrastructure assets which are currently valued at historical cost as opposed to current value as required by the Government's Resource Accounting Manual.