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The Accounts have been prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2008: A Statement of Recommended Practice (the SORP) issued by the Chartered Institute of Public Finance and Accountancy (CIPFA) and also with guidance notes issued by CIPFA on the application of accounting standards (SSAPs and FRSs).
The accounting convention adopted for the preparation of these accounts is a historical cost basis modified for the revaluation of certain categories of assets.
The qualitative characteristics, fundamental accounting principles, concepts and estimation techniques upon which the accounts have been prepared are set out below:
In accordance with FRS18, Accounting Policies, all information about the Authority's financial performance that is useful for assessing the stewardship of public funds and making economic decisions is disclosed within the accounts.
The Accounts represent fairly the substance of transactions that have taken place. The accounts are free from material error, complete within the bounds of materiality and have been prudently prepared.
Comparative figures have been included to allow performance to be compared with a prior period.
In accordance with FRS18, the accounts have been prepared in such a way to aid the understanding of the reader. We do, however, recognise the complexities contained within the Statement of Accounts. The Statements are prepared in accordance with accounting concepts, treatments and terminology that require reasonable knowledge of accounting and local government if they are to be properly understood. Summarised Accounts for 2008/09 will be published in Thanet Matters later in the year.
Materiality is a measure to ensure that information is of such significance as to justify its inclusion in the financial statements. An item of information is material to the financial statements if its misstatement or omission might reasonably be expected to influence assessments of the authority’s stewardship, economic decisions, or comparisons with other entities, based upon those financial statements.
The accounts, other than cash flow information, have been prepared on an accruals basis. This means that sums due to or from the Council in respect of the year of account are included whether or not the cash has actually been received or paid in the year. Exceptions to this principle are public utility accounts which are charged according to the date of the meter reading and some recurring sundry debtor accounts for which the due dates do not coincide with normal quarter dates. This policy is applied consistently each year and does not have a material effect on the year’s accounts.
The income to be recovered through ongoing benefit deduction is accounted for in the year of account and not when the cash has been received or paid in the year.
The income to be recovered through the issue of fines is accounted for in the year of account and not when the cash has been received or paid in the year.
The Accounts have been prepared on a going concern basis, on the assumption that the Authority will continue in operational existence for the foreseeable future. This means in particular that the Income and Expenditure Account and Balance Sheet assume no intention to curtail significantly the scale of the operation.
Local Authorities derive their power from statute and their financial and accounting framework is closely controlled by primary and secondary legislation. Where there is a conflict between a legal requirement and an accounting standard, the legal requirement will take precedence over the accounting standard.
An accounting policy specifies the basis on which an item is to be measured. Where there is uncertainty over the monetary amount corresponding to that basis the amount will be arrived at using an estimation technique.
All costs of management and administration have been fully allocated during the year on the following bases
The Council has established a spreadsheet based system which records the services supported by individual staff within Business Units. These allocations are costed and recharges for the costs of management and administration are prepared from this information and allocated to services.
In accounting for VAT, we comply with the SSAP5, Accounting for Value Added Tax and VAT is excluded from the main statements unless it is unrecoverable.
Government grants and other contributions are accounted for on an accruals basis and recognised in the accounting statements when the conditions for their receipt have been complied with and there is reasonable assurance that the grant or contribution will be received.
Revenue grants are matched in service revenue accounts with the service expenditure to which they relate. Grants to cover general expenditure (e.g. Revenue Support Grant and Area Based Grant) are credited to the foot of the Income and Expenditure Account after Net Operating Expenditure.
In line with FRS10, (Goodwill and Intangible Assets), expenditure on intangible fixed assets is capitalised at cost. An intangible fixed asset is one that has no physical substance but is identifiable and the Authority has control, (either through custody or legal protection) over the future economic benefits derivable from it. Council policy is to write down intangible assets to the relevant service revenue account in the year that they occur.
Recognition: All expenditure on the acquisition, creation or enhancement of fixed assets has been capitalised on an accruals basis. Expenditure on fixed assets is capitalised, provided that the fixed asset yields benefit to the Council and the services it provides, for a period of more than one financial year. Subsequent expenditure on fixed assets is capitalised in accordance with FRS15. This excludes expenditure on routine repairs and maintenance of fixed assets, which is charged directly to service revenue accounts.
Measurement:
Fixed assets have been valued on the basis recommended by CIPFA and in accordance with the Statements of Asset Valuation Principles and Guidance Notes issued by the Royal Institution of Chartered Surveyors (RICS). They have been classified into the groupings required by the 2001 Code of Practice on Local Authority Accounting, and have been valued on the following bases:
a. Land and Operational Buildings – The lower of net current replacement cost or net realisable value (as certified by the Estates Surveyor).
b. Council Dwellings – Existing use value for social housing.
c. Infrastructure Assets – Historical costs net of depreciation.
d. Vehicles, Plant and Equipment – The lower of net current replacement cost or net realisable value.
e. Community Assets – Historic cost.
f. Non-operational Assets (including investment properties) – The lower of net current replacement cost and net realisable value. In the case of investment properties, this is normally open market value.
Net current replacement cost is assessed as:
Depreciated replacement cost is only used where there is no active market for the asset being valued: that is where there is no useful or relevant evidence of recent sales transactions due to the specialised nature of the asset.
Revaluations of fixed assets are undertaken on a 5-year rolling programme, revaluing approximately one fifth of the Authority's assets annually. Council Dwellings are revalued annually using the Beacon principle. Identified material changes to asset valuations will be adjusted in the interim period, as they occur.
Surpluses from any revaluation of assets are credited to the Revaluation Reserve. The Revaluation Reserve contains revaluation gains recognised since 1 April 2007 only, the date of its formal implementation. Gains arising before that date have been consolidated into the Capital Adjustment Account.
Impairment: Where an impairment loss on a fixed asset has occurred as a result of a clear consumption of economic benefits (e.g. through physical damage or deterioration), the loss is charged to the relevant service revenue account. Other impairments (e.g. reflecting a general fall in prices) are written off against any revaluation gains attributable to the relevant asset in the Revaluation Reserve, with any excess charged to the relevant service revenue account. Where an impairment loss is charged to the Income and Expenditure Account but there were accumulated revaluation gains in the Revaluation Reserve for that asset, an amount up to the value of the loss is transferred from the Revaluation Reserve to the Capital Adjustment Account.
Disposals: Sales income from fixed assets where the amounts are in excess of £10,000 are classified as capital receipts. Income from the disposal of fixed assets is accounted for on an accruals basis.
A proportion of receipts relating to housing disposals are payable to the Government. The amount payable to the Government can be reduced where the Council elects to invest in certain regeneration projects or affordable housing. The balance of receipts is then required to be credited to the Capital Receipts Reserve and can then only be used for new capital investment or set aside to reduce the council’s underlying need to borrow. Receipts are appropriated to the Reserve from the Statement of Movement on the General Fund Balance. The written-off value of disposals is not a charge against council tax, as the cost of fixed assets is fully provided for under separate arrangements for capital financing. Amounts are appropriated to the Capital Adjustment Account from the Statement of Movement on the General Fund Balance.
Gains or losses on disposal are required to be calculated for disclosure in the Income and Expenditure Account, but ultimately income received from disposals is credited to the Usable Capital Receipts Reserve. This is only used for new capital investment or set aside to reduce the Council’s underlying need to borrow. The General Fund and the Housing Revenue Account benefit from the interest accruing from the unspent and set aside capital receipts.
Depreciation: With the exception of Investment Properties and Land (which are not subject to depreciation), assets are depreciated on a straight line basis over their useful economic life as follows:
Council Dwellings
The Major Repairs Allowance (MRA) is used as a proxy for depreciation
Infrastructure
Up to 40 years
Other Buildings
Specifically determined by Estates Officer
Vehicles
Up to 12 years
Plant
Up to 10 years
Revaluation gains are also depreciated, with an amount equal to the difference between current value depreciation charged on assets and the depreciation that would have been chargeable based on their historical cost being transferred each year from the Revaluation Reserve to the Capital Adjustment Account.
Newly acquired assets are depreciated in the year following acquisition unless the change in depreciation charge is considered material. Assets in the course of construction are depreciated when they are brought into use.
The depreciation of the Council’s dwelling stock has been calculated in line with previous guidance from the CIPFA/LASAAC Joint committee. It is now felt that a comprehensive review of the depreciation calculations for these assets is required and this will be undertaken for inclusion in the 2009/10 Financial Statements.
Grants and contributions: Where the acquisition of a fixed asset is financed either wholly or in part by a government grant or other contribution, the amount of the grant or contribution is credited initially to the government grants deferred account. Amounts are released to the relevant service account within the Income and Expenditure Account over the useful life of the asset to match the depreciation charged on the asset to which it relates.
Developers contributions received under Section 106 agreements that remain unused at year end are shown as ‘capital contributions unapplied’ in the Balance Sheet. Section 106 receipts are monies paid to the Council by developers as a result of the grant of planning permission where works are required to be carried out or new facilities provided as a result of that permission.
Service revenue accounts are debited with the following amounts to record the real cost of holding fixed assets during the year:
a) Depreciation attributable to the assets used by the relevant service
b) Impairment losses attributable to the clear consumption of economic benefits on tangible fixed assets used by the service and other losses where there are no accumulated gains in the Revaluation Reserve against which they can be written off
c) Amortisation of intangible fixed assets attributable to the service.
The Council is not required to raise council tax to cover depreciation, impairment losses or amortisations.
These occur when payments do not create a tangible or intangible asset. Council policy is to write down this expenditure in the year that it occurs. The full cost is charged to the relevant service in the Income and Expenditure Account but then reversed out through the Statement of Movement on the General Fund Balance to ensure that there is no effect on the revenue accounts as a whole.
Stocks relate to printing, stationery and marketing merchandise held at Visitor Information Centres and Museums. Stocks are also held at the Parks and Waste Direct Labour Organisations.
The Code and SSAP9, Stocks and Long-term contracts, require stocks to be shown at the lower of actual cost or net realisable value. The stock at the printing unit is measured at average cost of stock held as it is considered that the financial effect of the different treatment is not material. Any work in progress is subject to an interim valuation at the year end.
Rechargeable Works are included at cost.
Provisions are made where an event has taken place that gives the Council an obligation that probably requires settlement by a transfer of economic benefits, but where the timing of the transfer is uncertain. Provisions are charged to the appropriate services in the year that the Council becomes aware of the obligation, based on the best estimate of the likely settlement.
HRA Leasehold Service Charge accounts are raised after the accounts have closed as they are based on actual cost in order to comply with Leasehold conditions. A provision is made on the Leasehold Maintenance Holding Account for the estimated cost of Services, Day to Day Repairs, Recurring Maintenance and Major Works incurred during the financial year.
The Council sets aside specific amounts as reserves for future policy purposes or to cover contingencies. Reserves are created by appropriating amounts in the Statement of Movement on the General Fund Balance. When expenditure to be financed from a reserve is incurred, it is charged to the appropriate service revenue account in that year to score against the Net Cost of Services in the Income and Expenditure Account. The reserve is then appropriated back into the General Fund Balance statement so that there is no net charge against council tax for the expenditure.
Details of the Council’s reserves can be found within notes 37 and 38 to the Core Financial Accounts . Certain reserves are kept to manage the accounting processes for tangible fixed assets and retirement benefits and they do not represent usable resources for the Council.
Provisions are made for bad and doubtful debts and these are charged to the appropriate revenue account. In accordance with the CIPFA guidelines, for Council Tax and Business Rate debts, the older the debt the greater the provision, although depending on specific circumstances this may not be applied. Debts relating to garage rents are subject to a flat rate percentage based on historical trends whilst provision for harbour related debts over £100 are based upon individual circumstances. All HRA related debts and sundry debts over £2,500 are analysed and a provision made depending on individual circumstances, with the exception of leaseholder accounts as the Housing Act states that tenants should not subsidise Leaseholders, therefore no bad debt provision is made within the HRA. All other debts are subject to a range of specified percentages depending on validity of the existing debt, age and possibility of further recovery action.
Financial liabilities are initially measured at fair value and carried at their amortised cost. Annual charges to the Income and Expenditure Account for interest payable are based on the carrying amount of the liability, multiplied by the effective rate of interest for the instrument. For the Council’s borrowings this means that interest charged to the Income and Expenditure Account represent the amounts payable for the year in accordance with the loan agreements. Under the requirements of FRS25, 26 and 29 interest due (but not yet paid) on outstanding loans is added to the principal amount outstanding and is shown under short term borrowing in the Balance Sheet.
Financial assets are classified into various types:
Loans and receivables are initially measured at fair value and carried at their amortised cost. Annual credits to the Income and Expenditure account are based on the carrying amount of the asset, multiplied by the effective rate of interest for the instrument. For the loans that the Council has made, this means the amount presented in the Balance Sheet is the principal outstanding, and the amount credited to the Income and Expenditure account represents the interest received in the year according to each loan agreement. A small element of the loans are classified as soft loans (made at less than market rate) so there is a requirement to record any loss in the Income and Expenditure account to represent interest forgone over the life of the loan.
Rentals payable under operating leases are charged to revenue services on a straight-line basis over the term of the lease.
The Accounting Standard, FRS17 Retirement Benefits, requires recognition of pension assets and liabilities in the Balance Sheet and the operating costs of providing retirement benefits together with changes in the value of assets and liabilities to be reflected in the Income and Expenditure Account.
In order that FRS17 requirements do not impact upon council tax levels, the movement on the net assets and liabilities (net of the employer’s contributions and actuarial gains and losses) is reversed out to the Pension Reserve.
Contributions to the pension scheme are determined by the Fund’s actuary on a triennial basis. The latest formal valuation of the Fund for the purpose of setting employers’ actual contributions was as at 31 March 2007 and this has been used to update the 2008/09 service cost figures.
Liabilities of the pension scheme attributable to the Council are included in the Balance Sheet on an actuarial basis using the projected unit method. This requires an assessment of the future payments that will be made in relation to retirement benefits earned to date by employees, based on assumptions about mortality rates, employees turnover rates and projections of earnings for current employees.
Liabilities are discounted to their value at current prices, using a discount rate based on the indicative rate of return on high quality corporate bond.
The assets of the pension fund attributable to the Council are included in the balance sheet at their fair value:
Previously, quoted securities were valued at mid market value rather than bid price.
The changes in the net pensions liability is analysed into seven components:
Current service cost – the increase in liabilities as a result of service earned this year – allocated in the Income and Expenditure Account to the revenue accounts of services for which the employees worked.
Past service cost – the increase in liabilities arising from current year decisions whose effect relates to years of service earned in earlier years – debited to the Net Cost of Services in the Income and Expenditure Account as part of Non-Distributed Costs.
Interest cost – the expected increase in the present value of liabilities during the year as they move one year closer to being paid – debited to Net Operating Expenditure in the Income and Expenditure Account.
Expected return on assets – the annual investment return on the fund assets attributable to the Council, based on the average of the expected long-term return – credited to Net Operating Expenditure in the Income and Expenditure Account.
Gains/losses on settlements and curtailments – the results of actions to relieve the Council of liabilities or events that reduce the expected future service or accrual of benefits of employees – debited to the Net Cost of Services in the Income and Expenditure Account as part of Non-Distributed Costs.
Actuarial gains and losses – changes in the net pensions liability that arise because events have not coincided with assumptions made at the last valuation or because the actuaries have updated their assumptions – debited to the Statement of Total Recognised Gains and Losses.
Contributions paid to the KCC pension fund – cash paid as employer’s contributions to the pension fund.
FRS17 also requires the disclosure of any additional liabilities, for example those in respect of additional pensions paid on retirement under the Discretionary Payment Regulations (“compensatory added years pensions”) which are not paid from the Fund itself. This information has been provided by the Fund’s actuary and is included within the liabilities figures quoted.
Exceptional items are ones that are material in terms of the Council’s overall expenditure and not expected to recur frequently or regularly. The Council accounts for exceptional items in accordance with FRS3, Reporting Financial Performance.
Contingent liabilities are defined as possible obligations that arise from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the Council's control. If such obligations are likely, they are quantified and a disclosure note is added to the Accounts.
Contingent Gains are not accrued in the accounts but a note would be disclosed where such an inflow of economic benefits is probable. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
The Statement of Recommended Practice requires local authorities to consider all their interests in subsidiaries, associated companies and joint ventures and to prepare a full set of group financial statements where they have material interests, thereby providing a complete picture of the authority’s control over other entities. This Council has determined that it has no interests in subsidiaries, associates or joint ventures of a material nature, but has a Joint Arrangement, not an Entity (JANE) with Kent County Council (East Kent Opportunities LLP). In accordance with FRS9 the Council has accounted for its share of the assets, liabilities, income and expenditure within its own single entity accounts.
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E-mail:
accountancy@thanet.gov.uk
Tel: 01843 577000