Agenda item

Statement of Accounts

Minutes:

The report was introduced and the slides circulated to the Committee prior to the meeting explained the format, content and the rules that existed for the Statement of Accounts and highlighted some of the key points in relation to the 2015/16 accounts.

 

The County Council had £1.2 billion yearly gross expenditure. To comply with the rules of local government accounting the accounts have to apply with international standards and a range of notional transactions had had to be included to demonstrate compliance with international standards. These notional transactions are then reversed out, complicating the accounts.

 

In response to a question, the Chief Accountant clarified that there were two schools funded through PFI mechanisms in the 2015/16 year of account, neither of which had transferred to academy status. Looking to the future, one school was likely to move to an academy and the implications of this were being considered.  The arrangements would be dependent on who would continue to receive the funding for the borrowing. If this went to the academy the liability under the contract would also move to the academy. It was uncertain if this would be the case however as two schools were let as one contract and this contract would therefore need to be separated. The funding for borrowing would follow where the liability fell so there would be no impact on the Council however there would be notional adjustments to be made which would then need to be reversed out.

 

In response to a question, the Director of Finances and Resources explained that although it was too early to say what the impact of Brexit would be,  the Pension Fund since Brexit had increased in its value because of increased stock market valuations. There was uncertainty about the impact in the medium term but in the short term the biggest impact of Brexit had been on exchange rates rather than the value of assets. Most commentators anticipated that there would be a negative impact in medium term growth but the long term impact would depend on the alternative arrangements secured with the markets in Europe post Brexit.

 

In response to a further question in respect of PFI, the Chief Accountant reassured the Committee that the previous accounting treatment which was based on a set of assumptions and judgements on the contract was correct. The accounting was not wrong but the interpretation of the clauses in the PFI contract had changed as the external auditors had had a slightly different view of the assumption around the operator’s income from third parties. Any waste to resource plant would generate electricity and the income from this had to be treated as either due from the County Council or from users.  The interpretation of what was a user had been questioned. The external auditor’s interpretation of a user of the plant meant that the notional liability needed to be split. The PFI asset was shown notionally in the County Council’s assets and this had to be balanced against a finance lease. The interpretation placed by the external auditors meant that the liability had to be split between that which was related to the finance lease and that which was related to other third party operators. The issue came down to the interpretation of how the notional asset was funded, how much from the County Council and how much from the third party user. This resulted in many debates and the cost of service and cost of financing having to be split, however this was purely notional as the PFI asset was not yet the County Council’s. By the time the decision had to be made, the papers had had to be sent out to the Committee so the decision was made to defer the date of the Committee. The process would be much more straightforward next year as the interpretation had now been agreed.

 

In response to a question regarding the moving of un-useable reserves to useable reserves to cover the loss on the transfer of school premises for example, the Chief Accountant explained that un- useable reserves were the opposite entries for the notional accounting adjustments that had to be put through. For example the pensions liability did not, under the rules, have to be funded one hundred percent as there was time under the Local Government Pension Scheme to put the pension contributions aside,  however,  in reflecting the notional entry on the balance sheet there had to be an opposite entry. The same applied for asset accounting as this was a notional transaction which needed an opposite entry. The un-useable reserves were not cash backed. Within the cash backed reserves, money was earmarked for specific periods. For example where the County Council had to pay out on claims or pay for other capital obligations money had been put into earmarked reserves. Earmarked reserves were for a specific purpose in accordance with the scheme of management. The surplus from previous years was called a general reserve. There was never a transfer between cash backed and non cash backed reserves.

 

A question was asked whether  the general fund balance of £11.9 million was adequate considering that CIPFA had previously recommended that a 3-5% of managed turnover should be what was reserved.

 

The Chief Accountant explained that the general balance had to be spent when required. It was acceptable to spend on any deficit from general balances provided that there was a credible plan to repay the balances over a reasonable period. Due to overspend on care services general balances had gone down, however in 2016/17 the Council had budgeted for a contribution to go back into the balances of around £6 million. Taking a long term view,  the general balance would be brought back more in line with the assessed requirement. However rather than a 3-5% in balances a better approach to determine this amount  was to consider the risk associated. The better the risk assessment, the more money could be put into earmarked reserves and the less money was needed in general balances. An assessment had been undertaken of unknown risks and this had suggested that the County Council needed in the region of £18 - £20 million of available resources to fund these issues. When the contribution back into balances in 2016/17 was taken into account, together with an in year contingency provision of £2 million a year, over a five year period this was an addition £10 million of available resource. There was satisfaction that there was enough general resource to address risks assessed as part of the medium term financial strategy.

 

In response to a question, the Corporate Finance Manager explained that where schools converted to academies in legal terms the building and land was let on a long term lease of one hundred years or one hundred and twenty five years to the academy. The Council therefore no longer controlled the asset and the building was removed from the balance sheet. The land was kept on the balance sheet however as the Council still legally owned this but the value of the land was reduced to £1 to represent that the County Council could not have any say in how the land was used.

 

In response to questions in respect of the County Council’s interest in Entrust the Chief Accountant confirmed that in 2015/16 there was no dividend from Entrust. The Corporate Review MTFS Working Group would be considering when there was likely to be a dividend and how much that was likely to be. This would depend on the trading activity and performance of the company. Regarding the investment in Entrust, this was contained within long term investments on the balance sheet at Note 12 to the Accounts. The £53.7 million was made up of the Treasury Cash Investment of £30.4 million and the investment which the County Council held in Entrust which was £23.3 million.

 

 Resolved: That

·         Approval be given to  the 2015/2016 Statement of Accounts as included in the Committee papers.

·         Approval be given to the letters of representation from the Director of Finance and Resources.

 

Supporting documents: