CoP on Local Authority Accounting in the United Kingdom
Comments from ACCA
February 2007
Executive summary
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 2007.These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Panel, a group of experienced accountants working in the public sector.
ACCA agrees with almost all the proposals in the invitation to comment. We continue to believe, however, that UK GAAP has to be adapted significantly when being applied to local authorities. As part of this process, the CIPFA/LASAAC Joint Committee will have to continue to consider carefully the relative costs and benefits of applying relatively complex approaches to accounting, especially where the transactions or balances are relatively immaterial in the context of the overall financial position of local authorities. This issue is particularly relevant when considering the appropriate manner in which soft loans should be accounted for by local authorities.
Introduction
ACCA appreciates that CIPFA/LASAAC has taken the strategic decision to ensure that, where possible within regulatory constraints, the SORP is maintained in line with UK GAAP. We also appreciate that amendments have been made to the SORP over the last few years that are consistent with this approach.
ACCA believes the accountability relationships for local authorities and private companies are fundamentally different, and the form and content of their financial statements should reflect this. The financial statements of local authorities should principally reflect their role in ensuring transparency and accountability for the stewardship of public assets on behalf of the electorate.
Thus, we believe that one of the most important objectives of the financial statements of a local authority should be to fulfil this stewardship function by providing an audited comparison between the actual use of resources and that agreed in the authority's annual budget. For this reason we believe that the level of interest in the annual financial statements of a local authority is less than would be the case in a similar-sized private sector company.
As a result, we consider that greater weight should be given to ensuring the simplicity of local authority accounting practice and thus minimising the costs involved in the production of their accounts. This approach should also have the added benefit of ensuring that the financial statements are more easily understood by an authority's stakeholders, many of whom will be lay readers.
This issue is of particular relevance when considering the current proposals to update the Local Authority SORP, which include the inherently complex areas of accounting for and disclosing financial instruments.
Specific questions raised in the invitation to comment
ACCA agrees with most of the specific proposals in the invitation to comment. We have provided answers below to those consultation questions where we have any comments to make.
Financial instruments
Q1. Do you agree that it would not be credible to leave the SORP financial instruments' accounting requirements unchanged?
We agree that the SORP financial instruments' accounting requirements should be amended in the light of the Financial Reporting Standards (FRS) that have been issued on this area. Nonetheless, we consider that more weight should be given to ensuring that the accounting treatments adopted are not unnecessarily complex. This should ensure that local authority accounts are produced economically and that they are clearly understood by their readers.
Q4. Do you agree that:
(c) All authorities should account for similar transactions in a similar way and therefore the SORP should indicate how the discretions permitted generally to entities under FRS 26 should be exercised?
In broad terms we agree with this principle, but we also consider that simplicity and economy are important. Thus, for an initial period at least, we consider that local authorities should be allowed to implement the relevant FRSs with the full discretions that these allow. This should ensure that local authorities are allowed to discover the most appropriate manner to account for such transactions in practice, while balancing the costs and benefits of the alternative approaches.
Q5 Do you agree with the ITC's interpretation (see Appendix 1 of the ITC) of how amortised cost using the effective interest rate would apply to the following types of transactions:
(a) a fixed rate bond purchased at a discount?
(b) a fixed rate loan debt carrying a rate of interest that is not the same for the whole term of the loan ('stepped')?
(c) a variable rate bond purchased at a premium?.
We consider that the proposals for accounting for soft loans, outlined on pages 8-12 of the Invitation to Comment, may result in a significant burden for many local authorities without providing additional information for the users of the financial statements that would justify the costs and effort involved.
Revaluation reserve
Q29 Do you agree that the SORP should require the opening balance on the Revaluation Reserve at 1 April 2007 to be zero?
We agree with this proposal and the argument for adopting this approach, which is based on 'cost/benefit grounds'. We believe that this argument should be extended to other areas included in the Invitation to Comment, to ensure that local authorities are not burdened with unnecessary costs that do not result in a proportional increase in the value of the information provided in their financial statements.