Auditor Guidance Note 6 (AGN 06)

Transcription

1 Auditor Guidance Note AGN 06 Auditor Guidance Note 6 (AGN 06) Version issued on: 25 January 2017 About Auditor Guidance Notes Auditor Guidance Notes (AGNs) are prepared and published by the National Audit Office (NAO) on behalf of the Comptroller and Auditor General (C&AG) who has power to issue guidance to auditors under Schedule 6 paragraph 9 of the Local Audit and Accountability Act 2014 (the Act). AGNs set out guidance to which local auditors must have regard under Section 20(6) of the Act. The guidance in AGNs supports auditors in meeting their requirements under the Act and the Code of Audit Practice published by the NAO on behalf of the C&AG. The NAO also issues Weekly Auditor Communications (WACs) to local auditors to bring to their attention relevant information to support them in carrying out audit work. The firms that are local auditors under the Act may use WACs to update their own internal communications and reference tools. AGNs are numbered sequentially and published on the NAO s website. Any new or revised AGNs are brought to the attention of local auditors through the WACs. The NAO prepares Auditor Guidance Notes (AGNs) solely to provide guidance to local auditors in interpreting the Code of Audit Practice made under the Local Audit and Accountability Act The contents of AGNs cannot be reproduced, copied or re-published by parties other than local auditors without permission from the NAO. The AGNs are designed to assist local auditors in forming their own understanding of the requirements of the Code. Auditors are required to have regard to AGNs, which means that they must take into account the guidance issued by the NAO, and, if they decide not to follow it, they must give clear (in the sense of objective, proper, and legitimate) reasons within audit documentation as to why they have not followed the guidance. AGNs are in no way intended as a substitute for the exercise of the independent professional skill and judgement of a local auditor in deciding how to apply the NAO s guidance or when providing explanations as to why guidance has not been followed. Local auditors should not assume that AGNs are comprehensive or that they will provide a definitive answer in every case. 1 P a g e

2 AGN 06 is relevant to all local auditors of local government bodies covered by the Local Audit and Accountability Act 2014 and the Code of Audit Practice. Guidance on auditors work on value for money arrangements and on reporting is published in AGN 03 and AGN 07 respectively. Introduction The guidance within this document is prepared to assist auditors in meeting their responsibilities as the statutory auditor of local government bodies, under the Code of Audit Practice (the Code). This AGN sets out guidance for auditors to support planning work on audits of financial statements of local government bodies. The NAO will issue other supporting information through the WAC to assist auditors during As part of their planning process, audit teams identify changes to accounting requirements drawing on any relevant technical briefings prepared by their firms. This guidance is not intended to replace auditors own procedures. Local auditors are also component auditors. The NAO group audit team issues a group instruction which local auditors need to follow. The group instruction sets out requirements for local auditors to assist the NAO group audit team in meeting its responsibilities supporting the C&AG as the statutory auditor for the Whole of Government Accounts. 2 P a g e

3 Contents The AGN is structured as follows: Page Section 1: Statutory requirements 4 Reminder about the chief financial officer s section 114 responsibilities 4 Accounts and Audit Regulations Housing Revenue Account 8 Section 2: Developments in the financial and operating environment 10 Changes to local government finance - business rates 10 Combined authorities and other devolution deals 10 Flexible use of capital receipts 12 Pension fund early payments 13 Revising the Minimum Revenue Provision 14 Section 3: Local government accounting issues 17 Highways network asset 17 CIPFA s Telling the Story: accounting code changes 18 Other accounting code changes for Section 4: Developments impacting on police and fire bodies 21 The Policing and Crime Bill 21 Section 5: Look ahead to further accounting and audit developments accounting code 24 Possible revisions to the Accounts and Audit Regulations 25 Other support and raising technical issues or queries on this AGN 26 3 P a g e

4 Section 1: Statutory requirements Reminder about the chief financial officer s section 114 responsibilities 1. Under Section 114 of the Local Government Finance Act 1988 (the 1988 Act) the chief financial officer (section 151 officer) is required to report, following consultation with the council s monitoring officer, to all the authority s members if they believe that expenditure is likely to exceed incoming resources (after accounting for use of reserves) in the current or in any future year. When issuing such a report (sometimes referred to as a section 114 notice ) the section 151 officer is required to copy it to the external auditor. 2. Authorities are required by Section 32 of the Local Government Finance Act 1992, and in particular section 32(4), to set a balanced budget. However, financial pressures within the local government sector mean that there continues to be a risk that section 151 officers may need to consider whether they are required to take action under section 114 of the 1988 Act. Why is this important? 3. A report by a section 151 officer under section 114 will have significant consequences. Where the issue is a real or potential unbalanced budget, CIPFA s Guidance on the role of the Chief Financial Officer recommends that the section 151 officer consults the external auditor to help determine how to proceed. 4. Local auditors also have a range of reporting powers and responsibilities which need to be considered where the matter of a real or potential unbalanced budget arises. 5. Where there is the risk of a potential unbalanced budget auditors should liaise with the section 151 officer to inform consideration of possible actions, recognising their respective roles and responsibilities. This should include consideration of the potential actions the section 151 officer can take as outlined within CIPFA s guidance. 6. The auditor also has a number of relevant reporting powers and responsibilities under the Local Audit and Accountability Act 2014 (the 2014 Act). Under Section 29 and Schedule 8 of the 2014 Act the auditor may issue an advisory notice in relation to such a matter. Auditors should refer to AGN 04 Auditors Additional Powers and Duties and AGN 07 Auditor Reporting for further guidance on issuing an advisory notice (including discussing this with the Local Audit Code and Guidance team at the NAO), and engage with the section 151 officer regarding consequent courses of action 4 P a g e

5 should the section 151 officer s actions not be successful in averting an unbalanced budget. 7. Auditors should also consider the impact of the authority s actions on their opinion and VFM arrangements conclusion. When doing so, the extent to which the matter has been appropriately addressed within the authority s annual governance statement should be taken into account. 8. Regarding going concern, as local authorities are created and abolished only by statutory changes there is an underlying assumption in the CIPFA/LASAAC Code of Practice on Local Authority Accounting (accounting code) that their accounts will be prepared on a going concern basis. However, where auditors have significant concerns regarding an entity s ability to deal with financial pressures they should consider how the entity is disclosing these pressures in their financial statements in accordance with IAS 1 Presentation of Financial Statements. Concerns over financial health and the ability of the entity to continue in its current form need to be clearly disclosed. Bodies should also include relevant explanation within their narrative report. Where this is not the case, auditors should consider how to reflect this under their reporting responsibilities. Accounts and Audit Regulations The Accounts and Audit Regulations 2015 (A&A Regulations) have not yet been amended and remain in force for The A&A Regulations apply to relevant authorities other than health service bodies as defined by the 2014 Act. Why is this important? 10. The A&A Regulations apply to and auditors will wish to be aware of the impact of the regulations in respect of the requirements for narrative reporting and arrangements for the exercise of public rights. 11. The A&A Regulations make a distinction between Category 1 and Category 2 authorities. Category 1 authorities are all relevant authorities covered by the 2014 Act, except those falling under the definition of Category 2 (smaller authorities) in Section 6 of the Act. Category 1 also includes smaller authorities who have opted for a full Code audit. Narrative reporting requirements 12. The A&A Regulations require Category 1 authorities to produce and publish a narrative statement. Paragraph 8 of the A&A Regulations requires that a Category 1 authority: 5 P a g e

6 must prepare a narrative statement in respect of each financial year; and must comment in its narrative statement on its financial performance and economy, efficiency and effectiveness in its use of resources over the financial year. 13. The accounting code sets out the requirement in respect of the narrative report (equivalent to the narrative statement required by the A&A Regulations). The accounting code confirms that the narrative report should be fair, balanced and understandable and sets out high level principles for authorities to follow. Arrangements for the exercise of public rights 14. In respect of Category 1 authorities, paragraph 9(1) of the A&A Regulations requires the responsible financial officer to commence the thirty working day period for the exercise of public rights and to notify the local auditor of the date on which that period was commenced. Paragraph 9(2) is clear that the final approval of the statement of accounts by the authority prior to publication of the audited accounts cannot take place until after the conclusion of the period for the exercise of public rights. 15. Category 2 authorities (smaller authorities) are not required to re-approve the statement of accounts prior to publication, but must also wait until the conclusion of the thirty working day period for the exercise of public rights before publishing their accounts and the auditor s report. 16. As the thirty working day period for the exercise of public rights must include the first ten working days of July for both Category 1 and Category 2 authorities, this means that authorities will not be able to approve or publish their audited accounts before 15 July Preparing for earlier publication of audited accounts 17. Auditors should note that the A&A Regulations include a phased timetable for faster closure and publication of the audited accounts. From onwards the A&A Regulations bring forward the local government reporting timetable for published accounts for Category 1 authorities to 31 July. 18. There is a corresponding amendment to the arrangements for the exercise of public rights from for Category 1 authorities with the requirement for the thirty working day period for the exercise of public rights changing to include the first ten working days of June rather than July. 6 P a g e

7 19. Auditors should engage with audited bodies on how they are planning to meet the requirements of the A&A Regulations and accounting code in respect of narrative reporting. The narrative report does not form part of the financial statements and is not covered by the audit opinion. The accounting code specifies that the narrative report must be published with the financial statements. Auditors will need to review the narrative report for consistency with their knowledge drawn from their other work on the audit. 20. Auditors will be familiar with procedures for reviewing and reporting on consistency between other financial information and the accounts. Where there is an inconsistency auditors should consider whether and how to report on this, having regard to AGN 07 on auditor reporting. 21. Auditors should also keep in mind that narrative reporting includes a requirement for a commentary on economy, efficiency and effectiveness in the audited body s use of resources over the financial year. Auditors therefore should review the narrative report to consider whether there are any implications for their conclusion on VFM arrangements and where this is the case bring it to the attention of the authority. 22. Although the update to the accounting code specifies that the narrative report should be fair, balanced and understandable, this does not apply the Financial Reporting Council s Corporate Governance Code from which these principles are taken. This therefore does not trigger the enhanced reporting requirements under ISA (UK&I) 700 The independent auditor's report on financial statements (revised September 2014). Auditors should refer to AGN 07 for guidance on auditor reporting. 23. As part of planning discussions with audited bodies, auditors should discuss the lessons learnt from the exercise of public rights in and how any problems that occurred can be avoided. 24. Authorities and auditors should begin planning how they will meet the earlier timetable from onwards. Auditors should engage with their audited bodies to understand the arrangements needed to meet the required changes including, for example, considering whether a staged approach should be taken to bring the timetable forward this year. 7 P a g e

8 Housing Revenue Account 25. The Housing Revenue Account (accounting practices direction 2016) came into effect for financial years beginning on or after 1 April The direction applies to relevant housing authorities. 26. The Department for Communities and Local Government (DCLG) has consulted on the Housing Revenue Account: draft Item 8 credit and Item 8 debit (general) determination which will apply for periods beginning on or after 1 April Why is this important? 27. The Housing Revenue Account (HRA) direction sets out the statutory requirements for relevant authorities to follow in respect of the preparation of the HRA. The main change to the HRA direction is that it no longer specifies that the proper practices to be followed are the practices set out in the Guidance for Valuers on Stock Valuation for Resource Accounting 2010 (Stock Valuation Guidance). The direction instead refers only to proper practices. In this case the basis for preparing valuations is the Code of Practice on Local Authority Accounting in the United Kingdom for (the accounting code) and in support of this DCLG has issued stock valuation guidance for periods from 1 April DCLG has proposed to amend the Item 8 determination in to: continue to allow impairment charges on dwelling assets to be reversed out of the HRA following the end of the transitional period; extend the principle to non-dwelling assets in the HRA from ; and confirm that from depreciation should be charged to the HRA in accordance with proper accounting practices as set out in the accounting code. 29. This could have a significant impact on local authorities with depreciation no longer capped at the major repairs allowance amount. Authorities will need to consider the implications of the final Item 8 determination when it is issued in due course. 30. Auditors should engage with relevant bodies on how they are intending to follow proper practices in respect of the valuation of social housing under the accounting code and revised stock valuation guidance. 31. Where local authorities have significant non-dwelling assets, there may be an incentive to delay the recognition of any impairment or revaluation losses to This is because those losses would be charged to the HRA in but would be reversed under the proposals for (there is no retrospective application 8 P a g e

9 proposed in the determination). Auditors should factor this risk into their audit plans where significant. 32. Where local authorities are continuing to use the stock valuation guidance issued by DCLG, auditors should ensure that local authorities are applying the latest, 2016, guidance and associated adjustment factors. Auditors should note that for some regions the adjustment factors have changed significantly. 33. Auditors will also want to engage with bodies on the implications for financial management and financial reporting on the proposed changes to the Item 8 determination. 9 P a g e

10 Section 2: Developments in the financial and operating environment Changes to local government finance business rates 34. DCLG has consulted on its proposals to allow local government to retain 100 per cent of business rates. The department is considering the responses to the consultation and plans to issue a technical consultation on the application of the system which will allow authorities to begin to understand the implications for their financial position. Why is this important? 35. The change to allow business rate retention by the sector will have significant implications for the financing of local authorities. It may also impact on accounting arrangements, and DCLG is considering options for the appeals process which may also have accounting implications. This may affect the provision that local authorities make under IAS 37 Provisions, Contingent Liabilities and Contingent Assets in respect of the current appeals system. 36. Auditors should continue to follow the development of these proposals and how audited bodies are considering the impact on financial planning and reporting. In particular auditors should consider if there are any implications for their work on the accounts or value for money (VFM) arrangements arising from the detailed proposals. Combined authorities and other devolution deals 37. The Cities and Local Government Devolution Act 2016 (the 2016 Act) provides the legal framework for the implementation of devolution deals with combined authorities and other areas. A combined authority (CA) is a statutory body that enables a group of two or more councils to collaborate and take collective decisions across council boundaries to improve the delivery of public services and functions. CAs may be set up by two or more local authorities. Under the 2016 Act these authorities no longer need to be adjacent and can be in different county areas. 38. A council or group of councils may recommend the creation of a CA, which would then need to be approved by the Secretary of State, by order. Alternatively, the Secretary of State may decide to establish a CA, if the councils in the relevant area consent. The creation of a CA means that member councils can take advantage of additional powers and resources devolved to them from national government. 10 P a g e

11 39. There are two types of combined authority: those with a mayor covering the area of the CA; and those without. The legislation does not allow the creation of CAs in London, where the Greater London Authority is the comparable strategic body. 40. DCLG s arrangements and timetable for laying orders are linked to the progress of negotiating and agreeing local arrangements for each area. This may mean that there could be part-year accounts in some areas and DCLG will set out more detailed provision for these within specific orders. 41. Devolution deals negotiated so far have mostly involved transfer of powers over services such as business support, further education and skills funding, transport budgets and land management. A CA will have close working relationships with other bodies and third parties. This could include Local Enterprise Partnerships (LEPs) private sector-led voluntary boards of business people and council representatives with a range of powers and responsibilities. Why is this important? 42. CAs need to ensure their governance arrangements are sufficient to meet their new and expanding roles, and to monitor the performance and delivery of services and take action as appropriate. The 2016 Act requires all CAs to establish one or more overview and scrutiny committee and an audit committee. The Secretary of State may make provision about the overview and scrutiny committee, including the membership, the voting rights of members, the chair, and the publication of reports. 43. It is important to note that there are significant differences between those CAs which have a mayor and those which do not. All CAs can be funded by their constituent councils through a levy. This is a shift in funding from the constituent councils that make up the CA to the authority. It is not a means of raising additional resources. 44. Elected mayors can raise additional resources through a precept (or additional charge) on local council tax bills, but only where the order establishing them allows them to do so. Where the mayor is also the police and crime commissioner (PCC) and raises a precept in that role, the funds must be kept separate, and the PCC precept must be spent on policing. 45. All CAs will have the power to borrow money under the local government prudential borrowing regime, but the order establishing the authority must specify the purposes for which the money may be borrowed. 46. Many devolution deals include the retention of local business rate growth above an agreed threshold. Elected mayors of CAs will also be able to increase business rates by two pence in the pound if the relevant LEP agrees. Some devolution deals also include 11 P a g e

12 other devolved resources including, for example, a housing investment fund to support lending to housebuilders. 47. Auditors should be aware of these developments, and may wish to consider what proposals are being considered in their area, to inform their high level planning. Where a council is considering becoming part of a CA the auditor should consider how close they are to formation and therefore how well developed they may expect plans and systems to be. 48. Understanding the funding arrangements that are planned or in place at a particular authority, and the accounting systems to support them, may help to inform the auditor s planning. 49. Auditors should consider the accounting and disclosure requirements, for example, where the functions of an authority are being transferred to a CA or devolution-type deal. In addition, auditors should consider the likelihood of these deals coming into effect after the balance sheet date, the possibility of post balance sheet events, and whether there will be any requirement for part-year accounts. Flexible use of capital receipts 50. DCLG has updated its statutory guidance for local authorities for the flexible use of capital receipts. This has been designed to allow bodies to use capital receipts to fund transformational projects but only within restricted circumstances. Why is it important? 51. The guidance applies from 1 April 2016 to 31 March 2019 in which time authorities have the power to use capital receipts to fund transformational projects. The guidance is clear that only receipts generated in this period can be used to fund the revenue costs of such projects, so capital receipts previously generated cannot be used. Authorities are also not permitted to borrow to fund the revenue costs of projects. 52. The guidance is not prescriptive in terms of what can be funded as long as it meets the requirement that it is forecast to generate ongoing savings to an authority s, or several authorities, and/or to another public sector body s net service expenditure. 53. The guidance sets out the requirement for a strategy to be prepared by each body, preferably at the start of the year, setting out how the flexibility will be used. Full 12 P a g e

13 council should also be informed how the body is accessing the flexibility through the budget setting or medium term financial planning processes. 54. Auditors should determine whether their audited body is applying the flexibility. If so auditors should consider whether the audited body has established arrangements to ensure that it is complying with the guidance. Such arrangements should include ensuring that only capital receipts generated in the period set out in the strategy are being used to fund revenue costs. Pension fund early payments 55. Following the practice from the last triennial review it is likely that authorities will be considering options in relation to the payment of their pension deficit. One option proposed by the actuaries at the last triennial valuation was to pay the equivalent of the next three years instalments on one set date. The argument is that this will have revenue savings for the authority as a result of the increased amount of cash in the pension fund and therefore lower interest payments. 56. Auditors may find that, as with the previous triennial valuation, a number of councils consider allocating the year one payment in this situation across three years to calculate the General Fund charge in each year, i.e. treating the year two and three elements as early payments. Why is it important? 57. Authorities in taking such a decision will need to demonstrate that they are: obtaining VFM from this arrangement; acting reasonably by obtaining appropriate legal and actuarial advice; and complying with the requirements of the Local Government Pension Scheme Regulations 2013 (LGPSR 2013) in relation to pension payments, in particular that the payment structure is reflected correctly in the certificate from the actuary. 58. Authorities are able to use reserves to fund the payment. The full amount in year one is charged and then the authority can fund the element of payment in year one that relates to years two and three from an earmarked reserve. 13 P a g e

14 59. Auditors should consider whether the council has taken appropriate legal, actuarial and accounting advice such that they can demonstrate they are acting reasonably and accounting for the transaction correctly. Under regulations 62 and 67 of the LGPSR 2013 the amount payable is determined by the rates and adjustments certificate issued by the actuary. When an authority decides to make a single payment, that single payment must be accounted for in line with the certificate. Revising the Minimum Revenue Provision 60. Regulation 28 of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (2003 Regulations), as amended, requires local authorities to set aside a prudent amount of Minimum Revenue Provision (MRP). DCLG has issued Guidance on Minimum Revenue Provision which sets out the principles and processes to be followed in complying with the 2003 Regulations and gives four potential options which are consistent with these and which are referred to as options 1, 2, 3 and 4 below. 61. Local authorities, under the DCLG guidance, have to make an annual statement setting out their MRP policy for the year which is approved by elected members. Auditors will be aware that some authorities have been reviewing their policy in respect of making an annual charge for MRP. Changing MRP does not lead to an absolute revenue saving as the change typically reallocates the cost of financing into future years. Authorities, when revising their MRP, will need to consider the possible consequences such as maintaining a higher Capital Financing Requirement (CFR) and the interest implications of a higher underlying need to borrow. Why is this important? 62. Paragraph 5 of DCLG s MRP guidance states that the broad aim of prudent provision is to ensure that debt is repaid over a period that is either: a) reasonably commensurate with that over which the capital expenditure provides benefits; or b) in the case of borrowing supported by Revenue Support Grant (RSG), reasonably commensurate with the period implicit in that grant. 63. Options 1 and 2 of the DCLG guidance are methods of charging for MRP as if there were a link between borrowing and RSG, i.e. b) above. However, given that there is no longer any link between RSG and support for borrowing, then b) does not apply to new borrowing. Therefore, in such circumstances local authorities should be setting MRP over a reasonably commensurate period which matches the benefit of the asset, 14 P a g e

15 i.e. applying options 3 or 4. It is likely that authorities will be applying a combination of the options to reflect the borrowing undertaken when it was supported by RSG (options 1 and 2) and subsequent new borrowing (options 3 and 4). 64. Paragraph 3 of the DCLG guidance requires local authorities to approve an annual MRP statement before the start of each financial year and permits changes to this in year. Therefore local authorities may change their MRP policy provided it meets the requirement for it to be a prudent amount and meets the aims of the DCLG guidance (see paragraph 61 above). 65. DCLG has advised that in its view: under regulation 27 of the 2003 Regulations, local authorities must charge to their revenue accounts for each financial year MRP to account for the cost of their debt in that financial year; the 2003 Regulations make no provision for a credit to the account; and therefore the 2003 Regulations make it clear that MRP cannot be a credit but is an annual charge. 66. In respect of revising the authority s annual MRP statement, there are two questions that commonly arise: can the revised MRP charge be backdated? In other words whether local authorities can retrospectively restate previous year s accounts for excess MRP; and can a local authority that had in effect overpaid MRP make no charge for future years until the excess charge from previous years has been removed? 67. In respect of the first question, MRP is a statutory annual charge rather than a provision made under accounting standards and therefore cannot be credited back to the general fund. However in making the MRP charge, authorities will need to use a prudent technique. Changes in such techniques are not the correction of errors and therefore are not treated as prior period adjustments. Instead, any change in an amount previously calculated has to be applied prospectively. This does not preclude authorities from estimating what they would have charged in previous years as MRP, and then adjusting future years MRP to take account of any under or over charge arising in previous years. 68. In respect of the second question, where authorities identify that they have overcharged MRP in previous years, then any recovery in future years cannot result in a negative MRP charge. Local authorities with loan debt outstanding and a positive CFR must make a prudent MRP in other words they cannot have a break from making an annual charge. A prudent approach would be, for example, phasing in any reduction 15 P a g e

16 in future years MRP over a period commensurate with that over which the capital expenditure provides benefits. 69. Auditors should determine whether authorities have complied with the 2003 Regulations and DCLG guidance when authorities review their MRP policy. In particular, the auditor should consider whether an authority has followed due process by: considering all the options available and their wider impact on the CFR and underlying borrowing; determining what prudent means in the context of their authority; demonstrating that the proposed revised MRP policy complies with the requirement to make a prudent amount of MRP, including the robustness of any further legal or accounting advice sought, and in this case meets either a) or b) in paragraph 61 most likely a), for the reasons set out above; discussing any proposed changes with their auditors; and securing approval of elected members for the change in policy. 16 P a g e

17 Section 3: Local government accounting issues Highways network asset 70. CIPFA/LASAAC originally proposed that, under the accounting code, relevant authorities would measure the highways network asset (HNA) at depreciated replacement cost (DRC). In support of this CIPFA issued the Code of Practice on the Highways Network Asset (2016) (HNA Code) and Accounting Guidance for the HNA. 71. CIPFA/LASAAC subsequently decided to postpone the introduction of HNA accounting due to the uncertainty surrounding the work needed to calculate the central rates being ready in time for financial reporting timetables. CIPFA/LASAAC will confirm at its meeting in March 2017 whether the requirements will be brought into the accounting code. 72. If the decision is made to bring in accounting for HNA in it is expected to be on the same basis as it would have been for CIPFA has issued to preparers of accounts a series of briefing notes to support implementation. Why is this important? 73. If accounting for HNA is implemented it will present a change in accounting policy from 1 April CIPFA/LASAAC has agreed an adaption of IAS 1 Presentation of Financial Statements for the transition for the move to measuring the HNA at DRC so there is no requirement to restate the preceding year information or for an opening balance as at 1 April The change will instead be accounted for as an adjustment to opening balances as at 1 April Auditors should monitor developments and any further guidance from CIPFA following the CIPFA/LASAAC meeting in March, and should continue to work closely with relevant audited bodies to achieve their plans for complying with the accounting code requirements in respect of HNA, including considering the audit implications of the HNA Code. 17 P a g e

18 CIPFA s Telling the Story: accounting code changes 75. CIPFA has worked with stakeholders to improve the understandability of financial statements through its Telling the Story project. Consequently the accounting code requires: local authorities to report on the same basis as they are organised by removing the requirement for the Service Reporting Code of Practice (SeRCOP) to be applied to the Comprehensive Income and Expenditure Statement (CIES); and an Expenditure and Funding Analysis (EFA) which provides a direct reconciliation between the way local authorities are funded and prepare their budget and the CIES. This analysis is supported by a streamlined Movement in Reserves Statement (MIRS) and replaces some elements of the current segmental reporting note. Why is this important? 76. CIPFA regard these changes as key to supporting effective accountability. Bodies will need to consider how they will comply with the accounting code requirements in respect of these changes while continuing to make progress with their narrative reporting and their own steps to streamline financial statements where possible. 77. The EFA shows for each of the authority s services or directorates a comparison of the net resources applied and the net charge against council tax. It also provides the body with an opportunity to explain significant differences between the two within the authority s framework for accountability. To meet segmental reporting requirements the body is required to reconcile the relevant information in the CIES to the statutory position on the General Fund balance. The EFA is a note to the accounts, not a primary statement, which must be disclosed and numbered accordingly. However, it can be positioned in the financial statements where the authority thinks it would be the most helpful to inform the reader of the accounts. 78. For local authorities are required to report their service segments in the CIES based on the way in which they operate and manage services. There is no longer a requirement for the service analysis to be based on the definition of total cost or the service expenditure analysis according to SeRCOP. Where an authority uses a basis other than that set out in SeRCOP, it will need to select the presentation most commonly used by the individual or group within the authority who has the most significant role in allocating resources and assessing performance of services when considering the allocation of resources. This is a change in accounting policy due to change in presentation and therefore restatement (i.e. a prior period adjustment) of the CIES and MIRs is required. 18 P a g e

19 79. Bodies will need to comply with the accounting code s definition of income and expenditure. The accounting code specifies in para what should be included in other operating expenditure, financing and investment income and expenditure, and taxation and non-specific grant income and expenditure in the CIES. Therefore, where items of income and expenditure are normally reported to decision makers as part of directorates, they should still be presented in the CIES in line with the accounting code requirements and not be presented within cost of services. 80. Authorities should not gross up or include items that do not meet the accounting code definition within the CIES. Internal recharges such as internal trading income and expenditure do not meet the accounting code s definition of income and expenditure and therefore would normally be excluded from the CIES. Authorities may instead show internal trading recharges as a reconciling item in an additional segmental disclosure. 81. Overheads will need to be reported depending on whether the expenditure relating to these activities is reported to key decision makers as separate activities or spread across services as overheads for the financial statements. 82. The MIRS has been streamlined by the accounting code. Additional disclosure may be required to provide a true and fair presentation of the reserve position. 83. Auditors should confirm that audited bodies have understood and applied the changes to the presentation of the financial statements required by the accounting code. In particular auditors should review how authorities have met the presentational requirements for the CIES, MIRS and EFA. Other accounting code changes for The accounting code has also been amended for a number of issues. Local authorities need to comply with all the relevant requirements of the accounting code in their financial reporting. Auditors will wish to be aware of these changes and how bodies have addressed them. Why is this important? 85. It is important that authorities are aware of the new requirements of the accounting code for in order to comply with these changes. 19 P a g e

20 86. There have been the following changes to the accounting code: amendment to section 2.10 (Fair Value Measurement) to remove the scope exclusion on the disclosures for retirement benefit plan investments measured at fair value in accordance with section 6.5 (Accounting and Reporting by Pension Funds); an update to section 3.8 (Statement Reporting Reviews of Internal Controls) for the changes to the Delivering Good Governance in Local Government: Framework (2016) published by CIPFA and SOLACE; an addition to the definition of a related party in section 3.9 (Related Party Disclosures) for the changes to IAS 24 Related Party Disclosures in relation to key management personnel; clarification in section 4.1 of the treatment of accumulated depreciation and impairment for items of property, plant and equipment; amendments to section 6.5 (Accounting and Reporting by Pension Funds) as a result of a review of that section. These include: o update to the format of the Fund Account and the Net Asset Statement to be consistent with the new Financial Reports of Pension Schemes A Statement of Recommended Practice 2015; o confirmation of the new disclosure requirements for retirement benefit plan investments measured at fair value; o recommendations for a new disclosure on investment management transaction costs; and o a new Annex setting out the application of other sections of the accounting code. amendments to chapter nine (Group Accounts) for the changes relating to IFRS 11 Joint Arrangements Accounting for Acquisitions of Interests in Joint Operations, and to include an interpretation of IAS 27 Separate Financial Statements where the option to equity account for investments in subsidiaries, associates or joint ventures is withdrawn; clarifications based on changes to IAS 1 Presentation of Financial Statements arising from the International Accounting Standards Board's disclosure initiative, for example, the clarifications around materiality, order of notes, and disaggregation and subtotals; IFRS 8 Operating Segments and the requirement to disclose factors used to identify reportable segments where these are aggregated; and a new Appendix D listing the amendments to standards included in the acounting code. 87. Auditors should ensure that their bodies are aware of the changes to the accounting code and where relevant have prepared their financial statements to reflect these changes. 20 P a g e

21 Section 4: Developments impacting on police and fire bodies The Policing and Crime Bill 88. The provisions of the Policing and Crime Bill (the Bill) are likely to change the structure and legal status of many police bodies and fire and rescue authorities (FRAs). The Bill is expected to establish a statutory duty to collaborate at a local level in order to enable fire and police services to work more closely together and develop the role of our elected and accountable Police and Crime Commissioners (PCCs). 89. The Bill is expected to enable transfers of FRA responsibilities to the PCC through mechanisms which enable PCCs to take over the governance of their local FRA(s) where a local case is made, establishing a new organisation (the PCC-type FRA ). 90. Indicative timescales for orders suggest that the earliest date for creating a PCC-type FRA is 1 April 2017, however this is subject to a number of assumptions, including securing Royal Assent. 91. The provisions of the Bill include: introducing the duty to collaborate on all three emergency services; enabling PCCs to take on FRA functions where a local case is made; enabling PCCs to create a single employer for police and fire staff; and where PCCs do not become responsible for fire and rescue, enabling representation on the FRA with voting rights where the FRA agrees. 92. The boundaries of the PCC s police area and those of the proposed PCC-type FRA(s) when taken together must be coterminous. The Home Office has stated that the Bill enables the PCC to become the FRA for a given area, rather than merging both offices into one. The FRA remains a separate legal entity. Governance models under the Policing and Crime Bill 93. There are three different models proposed in the Bill to date that PCCs may adopt: the governance model; the single employer model; and the representation model. Governance model 94. The governance model (more likely to be adopted first) would enable PCCs to take on responsibility for the fire and rescue service(s) in their area. The government s intention is that this would provide more direct accountability to the public and accelerate local collaboration. 21 P a g e

22 95. The PCC would take on the functions and duties of the fire and rescue service for the area. The police service and fire and rescue service would remain two distinct organisations and the person who is elected to be the PCC would be classified as two separate corporations sole. 96. The PCC in their capacity as the FRA would be the employer of all fire and rescue staff, but in practice, a chief fire officer would, under arrangements made by the PCC, continue to have operational responsibility. 97. The chief constable will employ police staff and have direction and control over police officers. Single employer model 98. The single employer model enables a PCC who has taken on responsibility for fire and rescue services to take an additional step to delegate fire functions to a single chief officer for policing and fire. This could be either a police or fire officer. 99. The PCC would appoint a chief officer who would be accountable to the PCC for both fire and policing and would employ both police and fire personnel. In practice, the chief officer will appoint a senior fire officer to lead fire operations and a deputy chief constable to lead police operations, under their command. Legally, the chief officer would be known as the chief constable. Representation model 100. Where the PCC has not taken on responsibility for fire and rescue services but wishes to enhance collaboration opportunities between police and fire, the Bill provides for representation on local governance arrangements. Funding arrangements under the Policing and Crime Bill 101. Where a FRA becomes a PCC-type FRA, the following funding arrangements would apply: there would continue to be two separate precepts and two separate central funding streams for policing and fire; and a new fire fund would be established and held by the PCC as FRA mirroring the existing arrangements for the police fund Under the governance model, funding would be paid to the PCC for the two services in separate funding streams. The PCC would set two precepts one for fire and one for police. The money spent on each service would need to be accounted for separately. It would be possible for police or fire funds to be spent on matters of joint benefit, for example, shared back office functions, but funding would only be able to be allocated for the purposes for which it was paid. 22 P a g e

23 103. Under the single employer model, the PCC would provide two separate budgets to the chief officer, which the chief officer would need to account for separately. Why is this important? 104. The Policing and Crime Bill is yet to receive Royal Assent and the governance models are therefore unlikely to be fully implemented during However, there is potential that new structures could come in to place during Accounting treatments are yet to be finalised, but because new structures could be established part way through , there may be uncertainty and risks about whether police, FRA (and where appropriate, county council) financial systems are able to handle the necessary part-year financial reporting Auditors should be aware of these developments and what proposals are being considered in their area, to inform their high level planning for Where bodies are considering having plans in place to enable implementation during , (should the Bill be passed in time to allow this), auditors should consider what additional disclosures may be necessary for the financial statements. 23 P a g e

24 Section 5: Look ahead to further accounting and audit developments accounting code 107. CIPFA/LASAAC has consulted on the accounting code. The proposals include requirements relating to narrative reporting and changes arising from the introduction of new accounting standards. Local authorities will need to consider the implications for their own financial reporting and supporting arrangements. Why is this important? 108. The A&A Regulations require authorities to prepare a narrative statement. Regulation 8(2) of the A&A Regulations stipulates that a local authority must provide information on its financial performance and economy, efficiency and effectiveness in its use of resources over the financial year. For CIPFA/LASAAC has consulted on a principles-based approach to narrative reporting to achieve this requirement Narrative reports must continue to provide a fair, balanced and understandable analysis of an authortity s performance. The narrative report should be focused on those matters that are material to the understanding of the financial position and performance of the authority. In developing the narrative report bodies will need to consider the following matters: organisational overview and external environment; governance; operational model; risks and opportunities; strategy and resource allocation; performance; outlook; and basis of preparation The accounting code consultation also included appendices with exposure drafts of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. Both these standards are likely to be adopted in the accounting code and so the exposure drafts were published early to help authorities and auditors think through the consquences for financial reporting. There will be another opportunity for bodies and auditors to raise any matters for CIPFA/LASAAC to consider with regard to any adaptations or interpretations through the consultation on the accounting code. 24 P a g e

25 111. Auditors should engage with audited bodies to determine how they intend to comply with the narrative statement requirement. Although these requirements do not come into effect until some bodies may choose to adapt their reporting arrangements to prepare for their implementation Auditors should discuss with their bodies the implications for their financial reporting of the introduction of IFRS 9 and IFRS 15 in Where the implementation of these standards could lead to significant practical difficulties for local authorities this should be brought to the attention of CIPFA/LASAAC in the accounting code consultation. Possible revisions to the Accounts and Audit Regulations 113. DCLG is considering whether to revise the A&A Regulations. Any revisions would not come into effect any earlier than for financial years beginning on or after 1 April The A&A Regulations apply to relevant authorities other than health service bodies as defined by the 2014 Act. Why is this important? 114. If DCLG commences a consultation on revisions to the A&A Regulations we will bring this to the attention of local auditors through the Weekly or Special Auditor Communication as appropriate. Any revisions would not apply earlier than for periods starting on or after 1 April If DCLG makes revisions to the A&A Regulations auditors will need to engage with their bodies on how they are planning to meet the requirements of any revisions to the A&A Regulations, and ensure that relevant bodies are aware of the requirements for P a g e