THE DEVELOPMENT OF CAPITAL ACCOUNTING A PRACTITIONERS EVENT 15 JULY 2003 CIPFAS REVIEW OF CAPITAL AC

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THE DEVELOPMENT OF CAPITAL ACCOUNTING A
PRACTITIONERS EVENT15 JULY 2003CIPFAS REVIEW
OF CAPITAL ACCOUNTING

• Don Peebles CIPFA in Scotland

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CIPFAs Review of Capital Accounting

• Capital Accounting the Rationale Development
  of the current system
• Why review ?
• The Components of the Review Setting the Scene
• The Approach
• Initial Feedback from Stakeholders Problem
  Areas
• A Forward Look

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Capital Accounting - Rationale

• improve accountability for the use of capital
  resources
• identify the real economic cost of local
  authority services
• separate accounting for financing from
  accounting for capital assets

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Development of the current system

• LA balance sheets reflected capital yet to be
  discharged
• Introduced by the 1993 SORP (ACOP)
• Phased introduction in Scotland
• Supported by Consolidated Guidance Notes
• FRS 11 FRS 15

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The Principles of capital accounting
General Separate from financing All assets in
balance sheet
Consolidated Balance sheet Exp on accruals
basis Assets at current value Revaluation (5
years) Historical option materiality Three
capital reserves
Consolidated Revenue Account Inc/Exp of all
services Capital charge for asset use HRA
statutory charge Capital chargesdepfinancing
charge Dep loans charges in AMRA Diff to
CFR CFCR below net op exp
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The Capital Accounting Process - (or 10 easy
steps)

• 1 Balance Sheet records asset valuation
• 2 Acquisitions, enhancements, disposal recorded
  in Balance Sheet
• 3 Assets reviewed for impairment
• 4 Assets revalued every 5 years
• 5 Depreciation charged on operational assets
• 6 Interest charge calculated
• 7 Service cost includes capital charges
• 8 Asset Management Revenue Account reverses out
  capital charges
• 9 Asset Management Account records depreciation
  and external interest
• 10 Capital reserve adjustment to reconcile to
  amount to be met from taxation

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Why Review ?

• Practitioners concerns - LASAAC
• Whole of Government Accounts (WGA)
• Explore links with the forthcoming Prudential
  Framework
• System approximately 10 years young
• Barriers Constraints

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Components of the Review

• Overall assessment of current system impact on
  asset management
• Links with prudential framework
• Format of Consolidated Revenue Account
• Recognition measurement of infrastructure
• Notional interest rates
• Scope of capital charging
• Approach to non-operational and community assets

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The Approach
The search for practicable workable solutions.
Report to LASAAC CIPFA/LASAAC Preliminary
Report November 2002 CIPFA discussion paper on
depreciation released
CIPFA/LASAAC capital accounting workshop held in
Edinburgh March 2003
Report to CIPFA/LASAAC May 2003
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Feedback from stakeholders existing accounting
mechanism

• self serving technical exercise
• current system too complex
• more simplistic approachnecessary
• FARR, CFR not understood by members
• capital accountingnot taken seriously
• reason..is..it does not affect the bottom line

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Feedback from stakeholders impact on asset
management

• ignored by officers as there is no impact on
  council tax
• capital charges not not well understood by
  budget holders
• capital charges applied at financial year end
  as a notional exercise
• does not influence decision making

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Feedback from stakeholders - key messages

• Appropriate in principle but accounting
  complexity precluded understanding
• principle of accounting for capital accepted but
  weaknesses identified
• no teeth to advance asset management
• asset management improvement - bottom line a
  barrier
• Accountability blurred

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Identified Problem Areas Raised by Stakeholders

• Asset Management Revenue Account
• FARR CFR
• Capital Charges
• Deferred charges
• Cost of Compliance - valuation
• CFCR Disposals

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Impact of the Prudential Framework

• Local Government in Scotland Act 2003 repeals
  S.94
• Proper Accounting Practice adhere to definition
  of capital expenditure in the SORP
• Asset management higher profile
• no requirement to report in cash terms from
  2004/5
• Depreciation the future ?

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A Forward Look

• Revised Consolidated Capital Accounting Guidance
  Notes
• Modification to capital accounting from 2004
• Prudential Framework from April 2004 asset
  management is key
• Replacement for loans charges? Role of
  Depreciation?
• Contribution to Best Value
• Section 13 6(a) Local Government in Scotland Act
  2003 asset management (again)
• Role of Capital Accounting possibly strengthened
  not weakened