• Home
  • About
  • Newsletters
  • Conference
  • TMS Links
  • Calendar
  • Log In
  • Register

Room 151

  • 151 BRIEF

    What's New?

  • Trafford predicts £278m debt increase

    February 21, 2019

  • Select committee calls for change to business rates

    February 21, 2019

  • Local government finance system “not sustainable”

    February 20, 2019

  • County looks to raise cash from farm sales

    February 20, 2019

  • High street woes cause revenue dip at council-owned retail park

    February 20, 2019

  • Councils to receive full compensation for waste overhaul requirements

    February 20, 2019

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Jobs

Back to basics: What’s the point of accounting for depreciation?

0
  • by Guest
  • in Blogs · Resources · Technical
  • — 14 Nov, 2018

Local authorities, just like private businesses, have to account for the depreciation of their assets. Conrad Hall asks whether the current rules dictate inappropriate financial reporting.

What (with apologies to Monty Python) has accounting for depreciation ever done for local government?

Not much, one might argue.

Apart from compliance with accounting standards, and hence the corresponding unqualified opinions on our accounts.

Apart from the generally high regard in which financial management in the sector is held – which flows in part from following proper accounting practices.

Apart from, you could even try to argue, helping to sort out the mess back in the 1980s and early 90s, when some authorities almost routinely had years of unaudited accounts lying open.

Anyway, complying with the standards is a necessary but not sufficient condition for proper accounting.

If you really want proper accounting, then you should also want really proper accounting.

That means not just that you follow the standards – you also have to be satisfied that the standards are the right ones to apply.

As fixed asset accounting – and the associated depreciation charges and their subsequent reversal – takes time to calculate and tends to obscure the clarity of the presentation of local authority financial statements, it is fair to ask why we do it, not in the narrow sense of “because we have to” but by going back to first principles.

Distorted aims

This principles-based approach is necessary and, I would argue, overdue.

The discussion around the simplification of local authority accounts has to date largely focused on important but ultimately marginal improvements.

I don’t mean to decry the excellent work that has been done.

De-cluttering, removing notes, writing clear narrative statements and thinking more about presentation are all important in themselves, and have focused attention on an area that had previously received too little attention.

However, I now want to argue that our next step as a sector should be to build on these important improvements and collectively to pitch for a more radical approach.

Part of the underlying problem is that the framework for the local authority accounting regime is essentially based on private sector standards, although there have been some amendments and adaptations to these.

To make matters worse, legislative overrides have been introduced to avoid what have been perceived as adverse impacts on council tax.

The problem with this is made readily apparent by considering matters from the auditor’s perspective.

When you audit the accounts of a company, you are fundamentally concerned with two cardinal questions: is it a going concern, and do the accounts fairly present the value of the company?

The questions and the answers to them are driven by the needs of investors, and from the principles they represent flow the standards we all follow.

In the case of capital accounting you therefore depreciate your assets to help tell investors what your company is worth.

This could be either as a going concern, since it ensures that there’s provision for the replacement of necessary capital and hence that the profit accurately reflects this, or in an acquisition scenario so that the asset values reflect what a purchaser of the business might be able to sell them for.

You can’t buy a local authority and for practical purposes the going concern question is answered by reference to financial sustainability, the level of reserves and similar matters.

Furthermore, there’s a statutory framework – minimum revenue provision (MRP) – that provides assurance to taxpayers and government that a prudent approach is taken to ensure that debt is repaid, which is also important to financial sustainability.

Going further, whilst MRP is not the same as depreciation, one could argue that in several important respects it fulfils broadly the same accounting purpose.

Essentially, just like depreciation it ensures that there is provision for the replacement of capital, albeit it approaches the issue from the perspective of debt repayment rather than asset valuation.

Time for change?

So, is depreciation accounting necessary or even appropriate for local authorities?

If you had a completely free hand in designing the accounting standards that applied to the sector would you include it at all?

You spend considerable time creating capital accounting entries and reflecting them in the accounts.

There should be a reason for that.

I think most of us would agree that it doesn’t help with the clarity of the financial statements.

Some of us tried making the charges feel real by counting them against services’ cash limited budgets, but that approach was largely abandoned, I think because everyone knew in their heart of hearts that they were reversed out elsewhere in the accounts and so weren’t really real.

So, is the only remaining answer to my question “because we have to follow accounting standards”?

I’m certainly not arguing that we should ignore accounting standards.

As long as they exist we must and should follow them.

However, standards aren’t set in stone.

They can be changed – or at least their application to local authorities can, provided we can make a strong enough collective case to the relevant regulatory bodies.

You may not agree with me about capital accounting, but my wider point is that this principles-based approach is the one to take to make more dramatic progress on the accounts.

How about all the PFI notes about future cash flows?

They would be highly relevant if you were thinking about investing in a private company to know how much of its future revenue streams were committed to paying long-term contracts.

However, in a local authority you could argue that this is a bad case of measuring what can be measured rather than understanding what needs to be measured.

For authorities with social care responsibilities, any PFI commitments (which we analyse to death) are likely to be dwarfed by the social care commitments (which we don’t mention).

Whilst the contractual nature of those commitments is different, we are still guilty of allowing the standard to dictate inappropriate financial reporting rather than arguing for a standard that would require appropriate reporting.

I think that by applying this approach to each of the problematic areas of local authority financial statements and by focusing on principles, we can really improve local authority financial reporting.

It will take time and effort, and close working with the relevant regulatory bodies to demonstrate that we are on the same side.

We can win lots of incremental and individually-important battles in the long campaign to improve local authority accounts.

But if we focus solely on disclosures, notes and similar points, we might end up losing the war.

Conrad Hall is chief financial officer at London Borough of Brent

Get the Room151 Newsletter

Share

You may also like...

  • Enfield, Edmonton Green, housing Thinking cap – What does the scrapping of the HRA cap mean for finance directors? 8 Oct, 2018
  • James Bevan: Central banks, policy challenges and investor concerns 20 Jan, 2016
  • False dawn or well-founded optimism? False dawn or well-founded optimism? 23 Mar, 2012
  • Dan Bates: How should we measure financial resilience? 21 Aug, 2018

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room 151 5 hours ago

    Ashford to build and run solar farm to raise revenue: Ashford Borough Council will borrow £6m from the Public Works Loan Board to build a solar farm it says will produce a return of 6.7% a year to fund services.[...] dlvr.it/QzNZmS pic.twitter.com/khvp447NDe

    Room 151 1 day ago

    Croydon’s Brick by Brick to borrow more council money: London Borough of Croydon’s standalone housing company has pushed back the date by which it will become self-financing after announcing plans to borrow more cash to develop new sites. In[...] dlvr.it/QzKB8b pic.twitter.com/5E1RZyiIyv

    Room 151 1 day ago

    Councils to receive full compensation for waste overhaul requirements room151.co.uk/brief/#council… # localgov

    Room 151 1 day ago

    High street woes cause revenue dip at council-owned retail park room151.co.uk/brief/#high-st… #localgov #Bournmouth

    Room 151 1 day ago

    County looks to raise cash from farm sales room151.co.uk/brief/#county-… #localgov @StaffordshireCC

    Room 151 1 day ago

    Warrington outlines robust defence of out-of-borough investments: Warrington Borough Council has outlined its reasons for departing from government investment guidance and continuing to borrow to invest in revenue-generating property outside its… dlvr.it/QzJWtt pic.twitter.com/vxCqb5xnKT

    Room 151 1 day ago

    Managing ill-health risk in the LGPS: Barry McKay provides a health-check on how Local Government Pension Scheme funds can mitigate risks from ill-health retirements. Most LGPS benefits build up gradually during each member’s employment.  However, if[...] dlvr.it/QzJWqk pic.twitter.com/HyRrtUu8dw

    Room 151 2 days ago

    Business rates retention reform lacks rigour says IFS: The Institute for Fiscal Studies (IFS) says that the government’s proposals for reform of business rates retention need further work. The Ministry of Housing, Communities and Local Government (MHCLG)… dlvr.it/QzDVm8 pic.twitter.com/QKNrDyZP74

    Room 151 2 days ago

    Ashfield raises property stake to £104m room151.co.uk/brief/#ashfiel… #localgov

    Room 151 2 days ago

    Barking and Dagenham to double external borrowing room151.co.uk/brief/#barking… #localgov

    Room 151 3 days ago

    A busy and unpromising timetable for local authority finances: Richard Harbord looks at the large amount of central government measures affecting councils due over the next 13 months. Time is running out, the current uncertainty damaging, and the… dlvr.it/Qz81pV pic.twitter.com/FvQbpvz2dn

    Room 151 3 days ago

    Getting to grips with governance: Poor governance can make the difference between local authorities coping and not coping. Aileen Murphy explores what national government should be doing to help section 151 officers carry out their[...] dlvr.it/Qz81kf pic.twitter.com/2tywD1wu7H

    Room 151 6 days ago

    Sutton announces new chief executive room151.co.uk/brief/#sutton-… #localgov @SuttonCouncil

    Room 151 1 week ago

    Spelthorne halts commercial property investment: Spelthorne Borough Council has called time on its controversial programme of borrowing from the Public Works Loan Board (PWLB) to fund commercial property investment. Over the past three years, the[...] dlvr.it/Qyvbrt pic.twitter.com/yECeMm6uUP

    Room 151 1 week ago

    LGPS board considers guidance to avoid conflicts of interest: The LGPS Advisory Board is consulting on whether new rules are needed to avoid conflicts of interest in the governance of the scheme. It has appointed pension adviser Hymans Robertson[...] dlvr.it/Qyvbk7 pic.twitter.com/hLtp4ekKuH

    Room 151 1 week ago

    Eighty percent of councils lack faith in sustainability of local authority finances room151.co.uk/brief/#eighty-… #localgov

    Room 151 1 week ago

    MP criticises county over incinerator project room151.co.uk/brief/#mp-crit… #localgov

    Room 151 1 week ago

    How National LGPS Frameworks are saving funds and pools millions: With more than 247 contracts already let and £105m secured in savings, National LGPS Frameworks have become the ‘go-to-route’ for specialist procurement within the LGPS, according to Leon… dlvr.it/QyqR7k pic.twitter.com/Vc40cgTDjb

    Room 151 1 week ago

    Haringey reserves raid ‘unsustainable’ say officers: London Borough of Haringey has agreed plans to balance its budget for next year by dipping into its reserves and proposing £13.7m of cuts whilst increasing spending on social care[...] dlvr.it/QyqR33 pic.twitter.com/GT8PNPOAmM

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
  • Archives

    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Taking stock: equity investment within the LGPS
  • Next story Brunel selects Colmore for private markets admin support

© Copyright 2019 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK