Statement of Accounts 2010 to 2011

Explanatory Foreword

Introduction

The purpose of this foreword is to provide the reader with an understanding of the accounting statements, a review of the Council’s financial performance in 2010/11 and an explanation of the overall financial position. 

Accounting Statements

The accounts have been prepared in accordance with the Accounts and Audit Regulations and the Code of Practice and guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA). The accounting policies adopted by the Council are outlined in this document and have been fairly and consistently applied. 

The statements comprise: 

The Core Statements

Movement in Reserves Statement - This Statement shows the movement in the year on the different reserves held by the authority, analysed into “usable” reserves (those that can be applied to fund expenditure or reduce local taxation) and other reserves. The “Surplus or (Deficit) on provision of services” line shows the true economic cost of providing the authority’s services, more details of which are shown in the Comprehensive Income and Expenditure Statement. These are different from the statutory amounts required to be charged to the General Fund balance and Housing Revenue Account (HRA) for Council Tax setting and dwellings rent setting purposes. The “Net increase/decrease before transfers to Earmarked Reserves” line shows the statutory General Fund balance and HRA balance before any discretionary transfers to or from Earmarked reserves undertaken by the Council. 

Comprehensive Income and Expenditure Account –This statement shows the economical cost in the year of providing services in accordance with generally accepted accounting practices, rather than the amount to be funded from taxation. Authorities raise taxation to cover expenditure in accordance with regulations; this may be different from the accounting cost. The taxation position is shown in the Movement in Reserves Statement. 

Balance Sheet – This statement shows the value as at the Balance Sheet date of the assets and liabilities recognised by the authority. The net assets of the authority (assets less liabilities) are matched by the reserves held by the authority. Reserves are reported in two categories. The first category of reserves are usable reserves, ie those reserves that the authority may use to provide services, subject to the need to maintain a prudent level of reserves and any statutory limitations on their use (for example the Capital Receipts Reserve that may only be used to fund capital expenditure or repay debt). The second category of reserves are those that the authority is not able to use to provide services. This category of reserves includes reserves that hold unrealised gains and losses (for example the Revaluation Reserve), where amounts would only become available to provide services if the assets are sold; and reserves that hold timing differences shown in the Movement in Reserves Statement line “Adjustments between accounting basis and funding basis under regulations”. 

Cash Flow Statement – This Statement shows the changes in cash and cash equivalents of the authority during the reporting period. The statement shows how the authority generates and uses cash and cash equivalents by classifying cash flows as operating, investing and financing activities. The amount of net cash flows arising from operating activities is a key indicator of the extent to which the operations of the authority are funded by way of taxation and grant income or from the recipients of services provided by the authority. Investing activities represent the extent to which cash outflows have been made for resources which are intended to contribute to the authority’s future service delivery. Cash flows arising from financing activities are useful in predicting claims on future cash flows by providers of capital (ie borrowing) to the authority. 

Notes to the Core Statements – These are set out after the above core statements. They provide further information and interpretation of the content of the individual statements. 

The Supplementary Financial Statements 

Housing Revenue Account – The Council is required by law to account separately for the provision of housing. This account shows the expenditure on managing, maintaining and providing the Council’s housing stock and how this is financed by rents and other income. 

Collection Fund Account – The Collection Fund is an agent’s statement that reflects the statutory obligation for billing authorities to maintain a separate Collection Fund. The statement shows the transactions of the billing authority in relation to the collection from taxpayers and distribution to local authorities and the Government of council tax and non-domestic rates. 

Changes in Presentation and Accounting Policies

The annual statements of the public sector have previously been prepared using accounting policies based on UK Generally Accepted Accounting Practice (UK GAAP). In order to bring benefits in consistency and comparability between financial reports in the global economy and to follow private sector best practice, the Government announced in March 2007 that the public sector would adopt International Financial Reporting Standards (IFRS). Local authorities are required to produce their accounts on an IFRS basis for the first time in 2010/11. This has also resulted in the Council having to restate its balance sheet as at 1 April 2009 on an IFRS basis so that it shows meaningful comparative data. 

IFRS imposes significant additional reporting and disclosure requirements. The main changes for this authority’s accounts are summarised below: 

  • It has been necessary to review all leases where the Council is either the lessor or  lessee. Land has had to be treated separately from buildings under property leases. The IFRS definition of a lease is wider than that applied under UK GAAP and covers all contracts that depend on the use of an asset. The judgment as to whether a lease is a finance lease or an operating lease is more subjective under IFRS. More arrangements are now classified as finance leases which means more assets have been brought onto the balance sheet and more long term liabilities have been recognised. This in turn has had implications for the calculation of the Capital Financing Requirement, the Minimum Revenue Provision (MRP) policy and calculation, as well as for the Council’s prudential indicators.

  • IFRS has introduced different requirements for the valuation of assets which has impacted on the measurement basis and frequency of valuations.

  • The definition of investment assets is quite strict and these assets now require more frequent valuations. Consequently, some £9m of investment property has now been reclassified as “non operational land and buildings” in the restated balance sheet as at 1 April 2009. Gains and losses on the revaluation of investment property are no longer retained in the Revaluation Reserve on the balance sheet but are reflected in the Comprehensive Income and Expenditure Account under “financing and investment income and expenditure” and reversed out to the Capital Adjustment Account on the balance sheet to ensure there is no impact on the taxpayer.

  • Assets that have been identified for disposal but are not expected to be sold within twelve months of the balance sheet date are now classed as surplus assets under the balance sheet heading “Property, Plant and Equipment”. Only those assets expected to be sold within one year can now be classified as held for sale.

  • Government grant income used to finance the acquisition or enhancement of non current assets is no longer deferred and released to the General Fund over the life of the asset but is recognised immediately as “non specific grant income” in the Comprehensive Income and Expenditure Account and is then reversed out via the Capital Adjustment Account so that there is no impact to the taxpayer.

  • Similarly, any capital grants and contributions received with conditions on their use are released to the General Fund in the same way once the conditions have been satisfied. Where conditions are yet to be met, the grants are held on the balance sheet under “Capital Grants Receipts in Advance”.

  • Cash equivalents are now shown with cash balances in the balance sheet. Cash equivalents are short term investments that are readily convertible to cash within three months of the date of acquisition.

  • Authorities are required to analyse their financial performance in the Comprehensive Income and Expenditure Statement using the service analysis in the Best Value Accounting Code of Practice. However, a note to the accounts is now required under IFRS to show income and expenditure on the same basis as internal management reporting. The note also has to reconcile to the figures in the Comprehensive Income and Expenditure Statement.

  • The number of disclosures required as notes to the core financial statements have increased significantly under IFRS.

A series of new and revised accounting policies are now required to satisfy the conditions of the Code:

  • asset componentisation – the recognition of separate elements of major assets that have significant  value in relation to the total cost of the asset, or that have different useful lives.
  • asset impairment – more detailed accounting treatment for each class of asset where the recoverable amount of that asset is below the balance sheet value (carrying amount).
  • employee benefit costs – the requirement to account for accumulated compensated absences (untaken annual and flexi leave and lieu time at the year end) in the year the benefit is earned.
  • segmental reporting – the requirement to disclose information on income and expenditure segments based on the authority’s internal management reporting reconciled to the format in the Comprehensive Income and Expenditure Account (based on the Best Value Accounting Code of Practice BVACOP) in the notes to the accounts.
  • group accounts - the broader definition of group relationships under the Code where the ability to exert a significant influence on a body that the authority has an interest in can give rise to the necessity to publish group accounts.

Context for the 2010/11 Accounts 

Corporate Aims and Objectives

The Council’s aspirations have been distilled down into the following four areas: 

Prosperity – attracting sustainable employment, especially by supporting tourism and the green economy; 

Place – keeping Thanet beautiful by making the place clean, green and a healthy place to be; 

People – working together to make Thanet safe and improve the quality of life for all; 

Performance – delivering services we are proud of that make a difference and provide value for money for our residents. 

The Council’s budget allocates the resources available to meet these objectives. As the local government landscape continues to move, so will the Council’s priorities be continually reviewed and where appropriate revised. 

Current Economic Climate

The current economic climate and that of recent years has had considerable impact on the Council, particularly due to its strong reliance on revenue from interest on reserves and fees and charges. The Council has seen reduced investment receipts following a prolonged suppression in the Bank of England base rate to an historic low of 0.5%. A number of income streams have also been affected by the economic downturn, particularly planning fees, building control and land charge income, port income, car parking and green waste income. The Council has had to try to cut down its spending to mitigate the impact of these reductions. It has imposed a recruitment freeze, cut back on discretionary spending and has challenged managers to find efficiency savings. 

The Council has also seen a reduction in its area based and specific grant streams and is facing significant cuts in its Formula Grant, the likes of which have never been seen before by this council. The Council is facing a cut of 5.3% in 2011/12 (after receipt of transitional grant) which increases to 16.9% in 2012/13. This compares to an increase of 1.1% in 2010/11. A range of saving options have been developed to try to mitigate the impact of these cuts and enable the Council to set a balanced budget over the life of its Medium Term Financial Plan (2011 to 2015). These include a corporate restructure which will deliver substantial savings whilst also addressing the migration of substantial numbers of staff into shared services; working with neighbouring authorities via shared services across a number of service areas to deliver savings through mass economies of scale, whilst enabling best practice to be shared; and service efficiencies and reductions, particularly within non-priority services. 

The Council has reviewed its level of reserves, taking account of the financial risks that could pose a threat to the authority over the medium term and also in light of the cuts in future funding. The Council has set its optimal level of general reserves at 10% of the net revenue budget. The general reserves were only at 9% at the start of 2010/11 but as detailed below, the revenue outturn has enabled these reserves to be replenished to the 10% optimal level. In addition to the general reserve, a number of earmarked reserves exist. These are sums set aside for specific purposes and essentially allow funds to be saved over a number of years for large and often one-off items of expenditure, thereby smoothing the impact on Council Tax. The need for these reserves is reviewed regularly. The outturn for 2010/11 has enabled a number of contributions to be made to earmarked reserves as outlined later in the Explanatory Foreword. 

Also severely affected by the current economic climate are asset disposals. Selling assets does not necessarily represent value for money for the taxpayer at this point in time and so the Council’s ability to generate funds from releasing capital resources has been severely limited to the detriment of the Council’s capital programme. Only the most important capital projects are now selected for inclusion within the programme which means that the programme is now driven predominately in response to health and safety issues. 

The Council has reviewed its asset valuations in line with appropriate guidance. The Council’s social housing is valued on a basis called ‘Existing Use Value – Social Housing’ to which an adjustment factor is applied to reflect the fact that the property is used as social housing as determined by guidance issued by the Department for Communities and Local Government. This year there has been a significant reduction in the adjustment factor applied, falling from 45% to 32%, due to growth in vacant possession values, falling yields in the private rented market and continued rent restructuring in the public sector. This has contributed to a £39m impairment in the value of the housing stock. In the General fund, operational land and buildings have been impaired by £1.2m to reflect a fall in value.