Auditing the completeness of s106 liabilities

In our regular feature, Ask The Auditor, Graham Liddell from Grant Thornton UK LLP revisits two topics from previous blogs: s106 agreements and provisions for business rates.  To ask Graham a technical query, email editor@room151.co.uk

In response to a blog I wrote last year, I have been asked how auditors might go about testing for the completeness of s106 creditor liabilities.

Testing for completeness can be challenging: auditors need to obtain assurance about information that is not in the financial statements and may have not have been recorded at all. For s106 creditors, the challenge is all the greater because the liability will extend back to agreements made several years ago. Furthermore, authorities do not always maintain comprehensive management information about s106 agreements (see Ask the Auditor July 2013). The problem for auditors is, as Donald Rumsfeld might have put it, how to get to know about s106 liabilities that are unknown?

The audit tests selected by an auditor will depend on local circumstances including:

• their knowledge of the local authority, including the extent to which the local authority has entered into s106 agreements in recent years
• the robustness of the system for recording s106 agreement creditors.

For completeness, the auditor’s main concern is likely to be that the authority has not identified all the s106 agreements that might represent a liability. I would suggest that the starting point would be to get hold of the authority’s central register of s106 agreements, or if there is no central register the best list that is available. The auditor will then need to review a range of other sources of information to try to establish whether any s106 agreements are missing. This could include some or all of the following:

• talking to staff in both legal and planning:

o   what records (paper or electronic) do they hold?
o   does the department have its own local register?
o   what are the major s106 agreements that they know about?

• reviewing planning minutes and searching for s106 agreements
• reviewing payments made to developers after the year-end
• carrying out a web search.

Once the auditor has established that the register is complete, they will still need to make sure that the liabilities associated with the s106 agreements are properly reflected in the authority’s accounts. But compared to establishing the completeness of the s106 agreements, this should be relatively plan sailing.

Provisions for business rates

Business rates has appeared as a regular item both on Ask the Auditor and other blogs over the last year. With the financial statements audit in full swing, we are gaining a more detailed understanding of the approaches taken by local authorities, so now feels like a good time to revisit this issue. We are being asked four key questions:

1. What are the accounting requirements for business rates provisions?

Local authorities are liable for successful appeals against business rates. Local authorities should, therefore, recognise a provision under IAS 37 for their share of the amount businesses have been overcharged up to 31 March 2014. Provided that a reliable estimate can be made, this should include amounts for appeals that have not yet been lodged as well as those that have been lodged.
There are of course considerable practical difficulties for authorities in estimating the outcome for unlodged appeals, but both IAS 37 and the Code refer to the fact that it is only in extremely rare cases that a reliable estimate cannot be made.

2. What approach do we expect local authorities to have taken?

Where appeals have been lodged, we expect authorities to have determined a methodology for estimating a provision and to have applied this methodology consistently.
Where appeals have not been lodged, we expect authorities to consider the extent to which a reliable estimate can be made and recognise a provision where it is possible to do so. Where an authority considers that it cannot make a reliable estimate, we would expect the authority to:

• provide a robust analysis to support its judgement
• disclose a contingent liability for the amounts that cannot be reliably estimated

3. In practice, what have local authorities done?

Some authorities have provided for appeals that have not been lodged at the balance sheet date, whilst others have disclosed contingent liabilities.
Most authorities have based their estimate on the outcomes to date of appeals against the current (2010) ratings listing but we are aware of one authority that has based its estimate on the outcomes of appeals against the 2005 listing.

4. What approach will auditors take?

I would expect auditors to consider:

• whether the provision is consistent with other information available such as:

o   provisions made by comparable local authorities
o   outcomes from the 2005 ratings assessment
o   outcomes from the 2010 ratings assessment to date
o   information received after the balance sheet date

• where 2005 outcomes have been used to estimate the provision for the 2010 listing, whether the 2005 listing can be relied on to predict the 2010 listing provision
• where no provisions have been made for unlodged appeals, whether the local authority has provided evidence to support its assertion that a reliable estimate cannot be made
• whether there are any indications of management bias in the estimation of the provision.

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.