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CIPFA/LASAAC

Comments from the Association of Chartered Certified Accountants

January 2003

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the Code of Practice on Local Authority Accounting in the United Kingdom - a Statement of Recommended Practice 2003. These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Committee, a group of experienced accountants working in the public sector.

Local authorities should be treated in the same way as other entities. They should, therefore, not currently be required to implement in full FRS 17 on Retirement Benefits. This is in line with the Accounting Standards Board announcement postponing the full implementation of this Standard.

ACCA considers that the CIPFA/LASAAC Joint Committee should give more thought to the practical effects of its proposed changes to accounting for local government pensions schemes in the accounts of the local authorities. We are concerned with the possible future impact which the proposals may have on:

• the future prospects of the local government pension schemes themselves
  and
• relationships between the Joint Committee and HM Treasury on future standard setting for the public sector.

The wording for the disclosure of payments for non-audit services provided by the external auditors of local authorities should be extended. This should cover all services which may be provided by the appointed auditor (and any external provider of internal audit services to the authority) including those provided by the auditor's own organisation and by any associated firm.

Specific Questions Raised in the Invitation to Comment

FRS 17 Retirement Benefits

Q1 Do you agree with the Joint Committee�s approach to implementing FRS 17, subject to the necessary legislation being in place?

ACCA does not agree with the Joint Committee�s approach of proposing the immediate full implementation of FRS 17 on Retirement Benefits. Local authorities should be treated in the same way as other entities and so they should not currently be required to implement FRS 17 on Retirement Benefits in full. They should, however, be required to make the appropriate disclosures required by FRS 17. This is in line with the Accounting Standards Board announcement postponing the full implementation of this Standard.

We recognise that accounting for pension costs provides a significant challenge as the long-term nature of the pension obligations has to be matched with the associated pension scheme assets whose values are often subject to significant short-term fluctuations.

Local authorities are currently required to have actuarial valuations of their pension schemes undertaken at least once every three years. The extent to which this valuation indicates that the past service liabilities of the authority are funded is then included as a note, while the actual pension contributions made by the authority are recognised in the accounts. This approach means that any surplus or deficit in the pension fund is not recognised in the accounts and the actuarial valuation provides a significant smoothing mechanism which eliminates most of the short-term fluctuations in the balance of the pension fund.

The Joint Committee's proposals will result in the full effect of these short-term fluctuations being reflected in the accounts of a local authority, while the future obligations will be subject to a constant level of discounting. These changes may have a number of practical effects. This could include an impact on the level of Council Tax which an authority would have to levy to ensure that a balanced budget was achieved and also on the level of borrowing which the authority would be able to undertake under the proposed prudential borrowing scheme. The first of these is to be addressed through secondary legislation, but the second effect does not appear to have been considered by the Joint Committee.

We consider that the Joint Committee is taking too passive a role in this matter and that more thought should be given to the practical effects of the proposed changes. Thus, the SORP should not be influenced so strongly by the approach being adopted by HM Treasury in preparation for the implementation of Whole of Government Accounts. It will be preferable that there is a convergence in accounting treatments between the approach adopted by HM Treasury and that adopted in the SORP by the Joint Committee. Rather than the Joint Committee merely adopting the approach outlined by HM Treasury, some mechanism should be adopted for agreeing such a joint approach. The Joint Committee's proposals present an unfortunate precedent in this regard.

Further consideration should also be given to the implications of the proposed approach arising from possible future legislative changes and their effect on the level of Council Tax which is required to be levied. A future government would find it relatively easy to amend or repeal the proposed secondary legislation. As a result, local authorities could have to set their levels of Council Tax or amend their levels of expenditure to reflect the extent of the surpluses or deficits in the relevant local government pension schemes.

We are concerned with the approach proposed by the Joint Committee of making the accounting treatment to be adopted so explicitly dependent on the passage of associated legislation. If a certain accounting treatment will ensure that the accounts of a local authority 'present fairly' its financial affairs, it follows that this approach should be adopted, irrespective of the legal effects of it.

The issue of convergence between the UK's accounting standards and those of the International Accounting Standards Board should also be considered, especially with the decision by the European Union that publicly quoted companies will be required to adopt International Accounting Standards from 2005. Requiring local authorities to adopt FRS 17 in full now will mean that, in a few years time, they will be required to make a further significant change to the way in which they account for retirement benefits.

Q2 Do you agree with the content of the proposed amendments, and the structure (i.e. principles in the main body of the SORP, detailed guidance in the Appendix)?

We agree with the structure proposed for the SORP, with the principles to be included in the main body of the SORP and the detailed guidance in an Appendix.

Q3 Do you agree that the discount rate adopted should be a risk free rate, as advocated in paragraph 2.11?

We agree that a risk free rate of 3.5% is currently the appropriate rate at which to discount the pension scheme liabilities of local authorities.

Q4 Do you agree that disclosure of the amount charged to the tax funding requirement is required, as recommended by paragraph 2.12?

We agree with the proposal that, as the amount chargeable to taxation for pensions for the year may not be equal to the cost of pensions as defined by FRS17 and the proposed SORP, it should be disclosed.

Q5 Do you agree with the Joint Committee�s approach to the inclusion of guidance on the treatment of unrecoverable surpluses, as recommended in paragraph 2.13?

We agree with the Joint Committee�s approach to the inclusion of guidance on the treatment of unrecoverable surpluses.

Disclosure of Audit Costs

Q6 Do you agree with the principle of disclosing payments in respect of services provided by the external auditor?

We agree with the principle of disclosing any payments made by an authority in respect of non-audit services provided by its external auditor.

Q7 Do you agree that the wording of the disclosures adequately reflects local government circumstances?

We recognise that local authorities are severely restricted on the extent to which they can use their external auditors to provide other services. We believe, however, that, where an authority does pay its external auditors for any additional work, these payments should be disclosed. We consider, therefore, that the wording proposed by the Joint Committee should be extended to cover all services which may be provided by the external auditor, including those provided by the auditor's own organisation and any associated firm. We further consider that the disclosure of any such payments should clearly indicate the amounts paid for the following types of work:

• tax advice work
• work connected with restructuring, acquisitions and disposals
• other assurance work
• other ICT related consulting services
  and
• general consulting services.

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