NEW FEATURE: Ask the Auditor

In the first instalment of our new, regular feature, Ask The Auditor, Graham Liddell from Grant Thornton UK LLP explains how he would deal with some of the hot topics facing local authority accountants today. To ask Graham a technical query of your own, email editor@room151.co.uk

A treasurer has asked “Why are my auditors telling me that I should provide for aftercare costs for our closed landfill site? What are the implications?”

Some local authorities are responsible for aftercare of closed landfill sites. Authorities generally budget for and charge these costs as service expenditure as the costs are incurred.

However, CIPFA’s Code of Accounting Practice requires authorities to:

• provide for expected aftercare costs as soon as a landfill site comes into use
• charge the costs to property, plant and equipment
• depreciate the capitalised aftercare costs over the useful life of the site.

Closed landfill sites have reached the end of their useful lives. The capitalised aftercare costs should therefore have been fully depreciated and charged, via the movement in reserves statement, to the capital adjustment account. Most authorities will, however, have many years of aftercare costs left to pay on the closed sites and so should continue to recognise a provision on their balance sheets.

Under the capital financing regulations, authorities must charge a prudent amount to the general fund for the capitalised after care costs. We would expect authorities to do this as part of an increased minimum revenue provision (MRP). The simplest method, which avoids the need to rework budgets, is to charge an additional MRP equal to the aftercare costs an authority incurs each year. If an authority wishes to set aside funds before it incurs aftercare costs, it can do so by charging the general fund with a higher MRP.

There are two further practical implications to consider:

• authorities may need professional advice to help estimate provisions for future aftercare costs
• where authorities have not provided and capitalised aftercare costs, they will need to consider whether this represents  a material error in 2011/12 and so require a prior period adjustment.

A chief finance officer has asked “What treatment would you recommend in relation to the Municipal Mutual Insurance (MMI) shortfall?”

Many local authorities have received letters from the MMI scheme administrator explaining that they are required to pay back a proportion of the amounts received from MMI for claims settled in previous years:

• this claw back applies to local authorities that are part of MMI’s scheme of arrangement
• the initial levy has been set at 15% of specific settlements.

Many authorities have estimated a provision in their financial statements of  15% of the settlements. This is supported by the scheme administrator’s statement that the 15% initial levy is the mid-point of their estimate for the final amount. Some authorities have provided for 100% because this is more prudent. However, accounts should not be based on the concept of prudence: the Code requires provisions to be the best estimate of the expenditure required to settle an obligation, rather than a pessimistic estimate. If authorities wish to set aside funds over and above their best estimate provision, they can do this by creating an earmarked reserve via the movement in reserves statement.

Under CIPFA’s Service Reporting Code of Practice (SeRCOP), insurance cost are allocated or apportioned to the services to which they relate. We would expect, therefore, the cost relating to the claw back to be apportioned to services.

A finance officer has asked “Which disposal costs can be charged against capital receipts?”

The capital financing regulations in England and Wales allow local authorities to charge the costs of, or incidental to, disposals of land to capital. There is no definition of what this means in practice, so it is up to each authority to consider what is reasonable for a particular set of circumstances.

CIPFA’s Guide to Capital Finance provides examples of what might be allowable. These include:

• advertising and legal costs
• taxes
• reasonable allocation of costs of support services (focusing on the marginal additional costs incurred).
• CIPFA’s Guide also gives examples of costs relating to the disposal that would probably not be allowable:
• deciding whether to pursue the disposal of an asset
• relocating staff
• scrutiny of the decision to dispose of the asset

Graham Liddell is Grant Thornton UK LLP’s national technical lead for the public sector.

No responsibility or liability is accepted by Grant Thornton UK LLP towards any person or organisation in respect of the use of, or reliance on, information contained in this column. For further information about Grant Thornton LLP’s work in the public sector, click here.