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Comments from ACCA
January 2006

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 2006. 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 (ITC). We believe, however, that UK Generally Accepted Accounting Principles (GAAP) will have to continue to be adapted significantly when being applied to local authorities. We also consider that the illustrations of the proposed new format of the statement of accounts should be revisited to ensure that they are made as accessible as possible for the lay reader.

Introduction

ACCA appreciates that the Chartered Institute of Public Finance and Accountancy/Local Authority (Scotland) Accounts Advisory Committee (CIPFA/LASAAC) has taken the strategic decision to ensure that, where possible within regulatory constraints, the Statement of Recommended Practice (SORP) is maintained in line with UK GAAP. We also appreciate that amendments have been made to the SORP over the last few years which are consistent with this approach.

ACCA believes, however, that the users and thus the role of local authority accounts are significantly different from the situation with private-sector companies. Thus, in its response to the Accounting Standards Board’s (ASB’s) Exposure Draft on its proposed Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities we commented that:

‘The ASB should recognise that the needs of users of the financial statements of public-benefit entities are different from those of the private profit-oriented sector. The adaptation of the defining class proposed in this exposure draft, essentially from investors to funders, is not adequate and is unrealistic.

In the public sector the range of users is potentially very wide and we consider that a multi-stakeholder model would be best suited to this case. If a single defining class of user is to be identified for this sector then this should be the electorate.’

Thus, ACCA believes that UK GAAP will have to be adapted when being applied to local authorities and we do not agree with certain of the comments made in CIPFA/LASAAC’s Invitation to Comment (ITC). These include, for example, the comment in paragraph 2.3 that:

‘there is no benefit to users of accounts if local authorities prepare their accounts on a different basis from other UK entities unless there are differences between local authorities’ activities and other sectors’ activities that are relevant to the way those activities are accounted for and presented in financial statements.’

We would also not agree with the comment in paragraph 4.4 that:

‘The preparation of accounts in accordance with UK GAAP is, in the Joint Committee’s view, a pre-condition of high quality financial reporting by local authorities.’

ACCA believes that 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 prime objectives of the financial statements of a local authority should be to fulfil this stewardship function by providing an audited comparison of the actual use of resources with that agreed in the authority’s annual budget. A council’s financial accountability arises from the budget-setting process, during which it gains authority for the levels of taxation which are to be levied and for the funding which will be allocated to the various services which it intends to provide. Thus the budget out-turn report should be one of the prime documents by which local authorities should be held to account for the regularity and probity of their financial management.

We also believe that it would be useful for CIPFA/LASAAC to work more closely with HM Treasury’s Financial Reporting Advisory Board to ensure that consistent standards are developed for public-sector financial reporting. Such a development would facilitate central Government’s Whole of Government Accounts project.

CLARITY OF ILLUSTRATION OF THE PROPOSED NEW FORMAT

The second question of the ITC suggests that one of the main motivations for changing the format of the statement of accounts for local authorities is to increase the extent to which it can be understood. There are, however, some aspects of the illustration of the proposed new format in Appendix A of the ITC which we believe would make the proposals less easy to understand.

Thus, in the income and expenditure account it is not clear why the account has been constructed so that the deficit is indicated as a positive figure (unless this is to provide consistency with the operating cost statement in central government resource accounts). We believe that this account should be arranged so that the expenditure figures are negative and the income figures are positive. This would result in surpluses being represented by a positive figure and deficits by a negative figure, as with a conventional profit and loss account.
Similarly, the signs of the figures in the Reconciliation of the Deficit of the Income and Expenditure Account to the Surplus on the General Fund are the opposite of those which we would expect. In addition, this statement is not really a reconciliation, but only a statement of the difference between the two figures. This difference is then explained in the second note to the accounts, which appears to make the reconciliation redundant.
The Statement of Total Recognised Gains and Losses also appears to indicate signs for the figures which are contrary to expectations. Thus, for example, the gain arising on the revaluation of fixed assets is expressed as a negative figure. This statement is made more confusing as the final line does not indicate whether the figure quoted is a gain or a loss.

Specific questions raised in the Invitation to Comment

ACCA agrees with most of the specific proposals in the ITC. We have provided answers below to those two consultation questions where we have any comments to make.

RECONCILIATION OF THE MOVEMENT ON THE GENERAL FUND

Q10. What in your view should the proposed statement reconciling the surplus or deficit on the Income and Expenditure Account to the movement on the General Fund Balance be called? So far, two options have been put forward:

• Option A – Reconciliation of Movement on the General Fund;

and

• Option B – Reconciliation of the Surplus or Deficit on the General Fund.

Please indicate whether you prefer Option A or Option B or alternatively suggest another name for the statement.

As indicated above, we do not consider that this reconciliation, in the format indicated, would provide any useful information unless it were expanded to include the information provided in the analysis in Note 2 to the illustrated new format in Appendix A to the ITC. We believe that the reconciliation should be expanded to include this additional information (and so the analysis in Note 2 would become redundant). ACCA considers that this reconciliation should then be known as:

Reconciliation of the Surplus (or Deficit) on the Income and Expenditure Account to the Surplus (or Deficit) on the General Fund.

PROPOSED REPLACEMENT OF THE STATEMENT OF TOTAL MOVEMENTS IN RESERVES WITH A STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

Q12. Currently the Statement of Total Movements in Reserves also partly fulfils the function of a Statement of Movement on Reserves but is difficult to understand in the current complex format. Do you agree that this information could be presented more simply in a note to the accounts disclosing the movements on reserves?

We agree. We believe, however, that an adequate explanation needs to be provided to enable the lay reader to understand the significance of each of the figures in this note.

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